Investors Need to Realize The Machines Have Taken Over

As our frequent readers know, The Trader has covered the HFT in depth over the past year. Yes, the market structure is broken, despite what “pundits” tell us. Our friends at Nanex have made it possible examining a second in milliseconds, and provided us with charts over the past years, of which majority of investors never get to see. Machines is the new normal, so either you adapt, or you won’t survive. Below is an excerpt from the latest interview of Nanex’s Eric Hunsander by Chris Martenson.

High Frequency Trading (HFT) deeply concerns Eric Hunsader, founder of Nanex. He worries that today’s investors, our regulators, — heck, even the HFT algorithms themselves — don’t fully understand the risks market prices face in the brave new era of bot-dominated trading.

For instance, Hunsader estimates that HFT algorithms are responsible for 70%(!) of all completed transactions on our exchanges, and for 99.9%(!!!) of all exchange quotes.

The pictures of trading floors you see on TV, where the people in bright jackets appear frantically busy in making their trades, have no bearing — claims Hunsader — on the actual trading action. The real action happens across fiber-optic cables, on racks of servers in cooled rooms; where an arms race defined by cable length and switching speeds is being waged

The reality is that the machines have taken over. When you buy or sell a security, the odds are extremely high the other side of the trade is being placed by an algorithm — one that cares nothing for the fundamentals of the underlying instrument. It simply is looking to make a quick profit, oftentimes measured in fractions of pennies. And this has vast repercussions for the stability and the fairness of our financial markets.

Because of speed advantages, HFT algos can see and react to prices faster than you can. Ridiculously faster. A second on the clock, to an HFT algo, is an eternity.

Full article here.