Automation and stocks

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Letter to the editor by Bill Farthing

By Bill Farthing

Over the past few years, our 12 major stock exchanges have become interconnected by a dedicated high speed computer network that permits the rapid trade of securities between buyers and sellers. Large computers at the exchanges permit a large volume of stocks, bonds and other securities to be traded every day. Brokerage houses are the traditional agents for both the buyers and sellers and all transactions are conducted in a regulated, closely monitored system.

However, the recent connection of another set of independent computers to the exchange’s network has allowed operations that are not so well regulated. These expensive fast machines run very expensive software that allows them to monitor the activity of the traditional trades being conducted on the network. When these monitor machines detect the start of a large volume purchase of a particular stock they can automatically, without human help, issue a buy order on that stock. The machines continue to monitor the stock’s price and when it increases by some preset amount, they can automatically generate a sell order on the stock they just purchased. The machine has then made a small profit from the small change in the stock’s price. It can complete a buy or sell orders in about 5 milliseconds, that’s 0.005 seconds. With their high speed orders and automated buy/sell decisions, these machines may complete more than one profit cycle on a given stock trade.

This process is described as ‘high frequency trading’ on Wall Street and it’s estimated that only 300 firms out of the 20,000 that trade securities are using it. However their activities account for some 73% of a typical daily trading volume of some 29 billion shares in all of the exchanges. Exact profits from these trades are unknown but it was estimated at $21 billion in the U.S. in 2008. The high frequency technique is also being used in other large exchanges around the world. No government agency or any of the stock exchanges have shown concern over these high frequency operations even though the markets suffered an unexplained $1 trillion momentary dip in value on May 6 of this year. The cause is unknown.

This taking of unearned profits from the traditional trades of securities reduces the capital that industries should receive, deprives investors of their gains and places a large amount of money in a few hands rather than a small amount in the many hands that we need to drive our economy. This is not the capitalism that made us who we are. But neither of our political parties dare touch these geese that lay the golden eggs to finance their election campaigns. The primary is Aug. 24 and the general election is Nov. 2.

Bill Farthing,