Tuesday, August 31, 2010

Super Computer taking over?

In a recent story (May, 2010), SEC Chairman Admits: We’re Outgunned By Market Supercomputers, a luddite might find reason to fear big brother. But in fact a mystery remains from the so-called "Fat Finger Incident" on May 6, 2010. The incident, such that it was, trigger "a total drop of 9.16 percent from the previous day’s close".

I'm sure conspiracy theories will abound as to the reason for this - including the demise of certain individuals. More to the point of this article, it cannot be sufficiently underestimated the problems the stock market has created.

It has been reported that because modern stock trading is essential completely electronic --- that dealers look to have their computers as close to the trading computers as possible. The idea is to be able to process orders microseconds quicker than the competition.

In fact it has also been reported that traders are "snipping" as the market moves. That is, "snipping" makes a few cents, if not hundreds of a cent as the market (or a particular stock) moves in a direction. It has even been suggested that dealers are making these "few cents" on their own client's "trades". It has even been suggested that these dealers, having prior knowledge of the limits of their clients, are pushing the pricing to the limit.

This last scenario, as suggested, means the buyer is actually paying more than they would have had the closing price not been known to the dealer.

If this is true, then it appears the dealers are undermining the confidence of their own business.


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