Algorithmic Trading is a term used to describe the use of computers to execute trading orders where algorithms decide, without in many cases human intervention, order parameters including timing, price and quantity.  Such automated trading is also referred to as “algo trading”, “black-box trading”, or “robo-trading”.   Algorithmic Trading is not restricted to trading in equity shares, but extends to futures, option, foreign exchange markets, and bond markets.

High-Frequency Trading (‘HFT’) is a term used to describe algorithmic trading executed by computers programmed to make complex trading decisions. Decisions based on information received electronically by those computers and processed faster than humanly possible.  Importantly, there is no investment strategy for which algorithms can’t be programmed.

From what I have read, but not independently verified, it is estimated that by 2009 HFT accounted for 73% of all U.S. equity trading volume, whereas in 2006 it is estimated that about 33% of all EU and US stock trades were driven by automatic programs.

Algorithmic Trading (including HFT) have received increasing focus after the so-called ‘flash crash’ that occurred on May 6, 2010 when the Dow suffered its 2^nd largest intraday point swing up to that date.  Moreover, there is considerable debate as to whether HFT is a driver of the volatility that has recently been experienced in the U.S. equity markets.

Two articles I have read on this are ‘HFT Is Not Responsible for Market Volatility – You Are!’ – reading time 4 minutes, and ‘High-frequency trading a receipt for economic disaster’ – reading time 4 minutes.

You might want to read both articles. I have little doubt that Algorithmic Trading and, in particular, HFT which largely entered the scene in 2007 following a change in U.S. Securities Rules, has changed the face of trading versus investing.

Only two weeks ago it was reported that a large number of global institutional investors are concerned about “the broad ramifications of high-frequency trading and its effect on the stock market” – see ‘Big Investors Cite Concern Over High-Frequency Trading’, reading time 4 minutes.

For the time being, until I study Algorithmic Trading generally and HFT in particular more carefully,  I am of the mind that both clearly have been, and continue to be, ‘game-changers’.  My current thoughts are:

• While computers calculate without emotion, their programs are dependent on the inputs, biases and logic of those who program them – or direct the programming of them.  Accordingly, once programmed, a computer will execute the trades it has been programmed to execute, but that programming may reflect – for but one example – an underlying belief that the U.S.$ is a ‘safe haven’.

  All trades driven by that computer’s program would then be biased toward trades that supported an underlying thesis that irrespective of U.S. economic direction or results, the U.S.$ will always be the favoured fiat currency.  Viewed conceptually, if built into trading program algorithms, such biases (and there could be an infinite number of them) could have short-term effects, and perhaps long-term effects, on financial markets.

• On August 22 and 25 I wrote the following commentaries: ‘When The Market Isn’t The Market’ – reading time 4 minutes, and ‘Computerized Trading’ – reading time 4 minutes.  Intuitively, I would rather participate in markets that are skewed more to an ‘investment model’ than to a ‘trading model’.

• Again, intuitively, while I have never believed in ‘buying the market’ (read ‘diversification’), had I believed in diversification up to 2008, the more I understood about Algorithmic Trading (including HFT) the less interest I would have in conventional large capitalization diversification investing – and the less comfortable I would be having others manage my capital for me.

You might also want to watch two videos, one titled ‘HFT Industry circles the wagons’ and a second titled ‘High-frequency traders transform markets’.

Interestingly, this morning I noted a reappearance of a suggested tax on financial transactions.  See ‘EU’s financial transaction tax is feasible, and if set right, desirable’ – reading time 5 minutes.  I, for one, think the U.S. Federal Government (both Democrats and Republicans) is far too prone to policies that favour what I consider to be a ‘super-profit environment’ for Investment Banks, Hedge Funds, and others in the ‘financial services businesses’.  I think that such taxes on financial transactions – where those taxes are paid by those executing the transactions and not included in money management fees – would only make sense.  That said, I think that is a rather naïve thought on my part, as I can’t imagine a circumstance where financial firms would not reflect a transaction tax in the fees they charges, whether they did that transparently or as a ‘hidden cost’.

Visit Stock Research Portal for free stock market data, analysis, and research on over 1,600 Mining, Oil and Gas Companies listed on the Toronto and Venture Exchanges. See our Legal Disclaimer.

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I suggest you take the time later today, or this weekend, to read ‘Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again’ – reading time 6 minutes, thinking time longer.

Written by Reggie Middleton of the BoomBustBlog, the article begins by saying:

“If I were able to show in this article that it really ISN’T different this time, would it change any decision maker’s path or actions? We all know the answer to that question. Time to get those outlier event short positions ready, it’s going to be a rough ride!!! A complete recap of recent events…”.  Middleton then proceeds to set out in what I think is a very logical way why as he says toward the end of the article “Since the problems have not been cured, they’re literally guaranteed to come back and bite ass. Guaranteed!”

While you may not agree with everything Middleton says, I think you owe it to yourself to read and think hard about his comments.

Visit Stock Research Portal for free stock market data, analysis, and research on over 1,600 Mining, Oil and Gas Companies listed on the Toronto and Venture Exchanges. See our Legal Disclaimer.

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On Wednesday, in a speech in Cleveland, Federal Reserve Chair Bernanke is reported as saying that ‘Long-term unemployment in U.S. is a ‘national crisis’’ – reading time 3 minutes.

I see this as an interesting development. Not because I haven’t believed for some time that U.S. unemployment is a huge problem that is not going to be resolved easily – if at all – but because Bernanke has come out and openly said what, I suspect, has been his private view for some time.  As an aside, if this has not been his private view for some time, in my view it ought to have been.  It seems to me that Mr. Bernanke said such a thing yesterday is one more indicator that ‘the wagons are circling’ in anticipation of further U.S. economic deterioration.

Also see an article dated September 29 titled ‘Bernanke Declares ‘National Crisis’ – reading time 5 minutes.  While this article does not reach any conclusions, let alone give the weight to Mr. Bernanke’s Wednesday comment that I think his comment deserves, it does set out five U.S. unemployment, inflation, and GDP related charts I suggest are worth your time to review.

Visit Stock Research Portal for free stock market data, analysis, and research on over 1,600 Mining, Oil and Gas Companies listed on the Toronto and Venture Exchanges. See our Legal Disclaimer.

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In a recent 30 minute interview conducted September 9 Doug Casey of Casey Research answers according to the title of the intereview ‘The Hard Questions About Hard Times’.

While I don’t agree with everything Casey says, much of what he says does make sense to me – in some cases ‘toned down a little bit’.  In particular Casey discusses in some detail his views as to where each of gold and the U.S.$ are heading, and discusses the junior resource companies in some rather ‘no holds barred’ terms.  If you participate as an equity investor in the Junior Resource Sector, or for that matter participate in the equity markets generally, I suggest you take the time to watch and think carefully about what Casey says in what I see as current volatile and uncertain financial markets and economic times.

I have heard many people describe Doug Casey as a ‘Libertarian’.  Broadly, a Libertarian is a person that ‘stands strong’ for individual liberty, with particular emphasis on ‘freedom of expression and action’.  Doug Casey comes across in his writings and interviews as someone who says what he thinks, without particular concern about who may or may not like or appreciate his views.  For me, that makes him worth listening to, where ‘listening to’ means considering what he says, weighing it, and deciding for yourself whether you agree, partially agree, or disagree with him.  Again, 30 minutes is a long time, but if you fall into the categories I described in the previous paragraph, I think you will find the referenced interview will give you useful ‘food for thought’.

Visit Stock Research Portal for free stock market data, analysis, and research on over 1,600 Mining, Oil and Gas Companies listed on the Toronto and Venture Exchanges. See our Legal Disclaimer.

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