The US stock market has been taken over – by smart people and smarter machines

The bottom line is that there are really smart people, using incredibly powerful computers, to trade in the merest fractions of a second. In fact, trades between New York and London are now occurring at pretty much the speed of light, and they are working on ways to do even better than that. More to the point, these folks are armed with self-teaching programs that are able to spot relevant signals among all the noise of complex markets, signals that then buy or sell without the owners of the models even knowing what factors the trading decisions are based on. And it’s even worse than that, because these programs are now able to anticipate what you will buy next, in order to buy it microseconds before you push the buy button, then sell it to you at a profit.

In other words, the US and other major stock markets are increasingly becoming something of a Battle Royale for machines, a microsecond-by-microsecond cage fight with the smartest machines reaping the biggest returns. What’s interesting – and you should keep this in mind before pushing your bright child into university – is that, like Steve Jobs, Bill Gates and so many in advanced technology, you need to be smart, but you don’t need to be university-trained in order to play. One kid we were hanging out with, despite being all of 23 years old and never having attended college, is using models to control something like 3% of the daily volume of exchange-traded US Treasury bills.

So, should you avoid stock markets altogether? Although some estimate that over 70% of all US stock market volume now emanates from computer trading models, and that number is sure to rise, I think it is still “safe” to trade in the major markets. Yes, you are getting beat out of fractions of pennies by the machines each time you buy or sell, but if you are in good companies, in a rising market, you can still be a winner. In that regard, the machines do generate a lot of volume, never a bad thing.

That said, it was abundantly clear that neither the regulators nor anyone else possesses nearly enough intellectual fire power, or the tools, to fundamentally understand the complexity of what’s going on. Thus, the potential for something like the flash crash to occur, or worse, is always out there.

Personally, I prefer the smaller, less actively traded markets such as the Toronto Venture Exchange (TSX-V). One can only hope that the market is too small and too thinly traded to warrant the attention of the robo-traders – but in time, I’m sure they’ll get to that as well, if they haven’t already.