Unfair Advantage? – Flash Crash part II

OK. You’ve got the concept of how the system works.  Now let’s do a little math.  If I know that a stock is going to change in value by 1 cent ($.01) and can obtain it a fraction of a second before someone else does and then sell it to them for the 1 cent difference often in less than a second I can make $0.01 (1 cent).  Now I’m not buying just one of each stock, let’s say I do this with 10 stocks for 1 million shares of each that’s 1,000,000 x 10 x $0.01 or $100,000.  Not a bad trade for less than a seconds work.  Certainly it isn’t foolproof and doesn’t result in a profit on every trade but how many seconds in a trading day?  6.5 hrs x 3600 sec/hr =  23,400 opportunities in one trading day.  Not bad odds.  So is the deck stacked?  Do some players have an Unfair Advantage?  Is the game Rigged?  Let’s think about this a little more.

How can a high-frequency trader get in and out of security before someone else completes their trade?  They have very fast supercomputers and excellent programmers, the best money can buy.  Yes Larry but so do many of the big players.  Remember those telephone lines and fiber optic cables we mentioned.  This information travels between computers in the form of bits of information at the speed of light.  These electrons that carry the data don’t always take the most direct path and often may run into congestion – think of a freeway at rush hour.  So if you can route your electrons between computers faster than the other guy you win that race.  Guess what.  As part of its modernization efforts the NYSE has a brand new state-of-the-art data center.  The exchange is a business in business to make money so if you have this incredible computing center and you can lease space to your customers for a fee in the same location, a practice known as co-locating, you can make some money.  Now if my electrons only have to travel around a room or even a mile outside and back inside the building and the other guys electrons carrying his order leaves his computer runs into traffic and gets rerouted through a couple different intersections even at the speed of light we can easily grab a few fractions of a seconds.  So here lies the opportunity – an algorithm that’s just a little faster, a computer processor with a little more speed, a network cable that can transmit just a little cleaner than another and a shorter more direct route to the destination computer all become some of the factors providing that little edge you need.  Get the picture?

We live in very interesting times.  Technology is wonderful and I’m sure you can tell I’m a bit of a geek.  I like to call myself a technology enthusiast.  I know just enough to be dangerous.  My opinion is the stock market has always been skewed more favorably to an inside elite.  Heck, have you ever tried to get a share of a stock at an IPO?  Unless you’ve already got lots of them (stocks, money, assets) and hold them with a large brokerage, preferably the one underwriting the IPO, you haven’t got much of a prayer.  You just have to wait until they hit the street and purchase from those favored few who are now selling them on the open market at a profit.  This is not unique to stock markets and investment banking.  It’s an issue that’s been around since the beginning of time.  What salesman who earns his living selling wouldn’t favor a customer who’s already earned him a bunch of money and/or will bring him more in the future.  Yes.  Truth is hard but so is life.   You just have to know the rules of the game.  Then you can play knowing what to expect and use that to your advantage/profit.  Or you can choose not to play in that game because through your careful analysis you determine that you start out at too great a disadvantage to make it a profitable endeavor.

That’s why I like real estate.  The stock market is a tough game to play.  Real estate has its rough spots and pitfalls to but with fewer barriers to entry and much less volatility.   You can choose to be directly involved or more passively as a supporter of specialists in the industry.  Let’s face it; the stock market today is pretty scary.  Technology has gotten way ahead of regulation and will likely stay that way for some time.  The regulators are still in disagreement as to who/what actually caused the Flash Crash (and possibly politically motivated to be very non-specific) and at best they’ll put a band aid on it today in the form of programmed (computerized) trading stops in the event of huge market moves.  They’re treating the symptoms not the illness.  And how about those banks.  What are your CD’s and savings accounts earning today?  If it’s over 1% you’re doing good and if over 2% you obviously know someone who wants your business, congratulations.  I am a real estate investor.  If you would like to learn how you can earn greater returns on your hard earned money of 10% or more backed by real estate please contact me.  I would love to talk to anyone who’s interested in finding good deals and securing their future.  I firmly believe the best way to get what you want is to help others get what they want!

To your success,

Larry

213 nine 7 three – twenty-two forty

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