Think you have what it takes to be a day trader? We’ve come a long way from the 1990s TV commercials touting “fast online execution” of your stock buys from a home computer. If you think day trading the news still makes sense, read on.
The fact is, we’ve come a dangerously long way. Even the biggest fund managers have trouble keeping up with high-frequency traders, phalanxes of geeks who use brute computing strength to their extremely short-term advantage.
As we learned recently from The Wall Street Journal, some public data suppliers are dishing out their numbers even sooner to whose who will pay for special “low-latency” lines. Basically, these are information speed lanes:
Investors with the superfast computers and algorithmic-trading software needed to read and act upon the low-latency line’s digitalized information will inevitably be the first to trade on the news. The advantage these high-tech traders enjoy is measured in just millionths of a second, but it will be more than enough time to beat competitors who instead must rely on news services that generate headlines from the Business Wire release.
There’s a strangely backward justification for this practice, which is highly controversial, naturally. The agency in question, the Institute for Supply Management, figures that giving it to the high-frequency traders first means everyone day trading the news will realize that they can’t win and thus, perversely, subsequent trading will turn back to being more “normal.”
The truly strange part is that every system has both human and mechanical parts. For instance, a wire reporter once told us about how he had the job of running central bank numbers in a South American country.
Literally running. He had to go to an office and get a bank publication, then call from a few blocks away by cell phone. He would bark out numbers to an editor, who had pre-written all the headlines: Money supply, inflation, all the newest data.
For some reason, the wire service was able to put those numbers out hours ahead of its competitors. Under typical conditions, beating a competitor by a fraction of a second is considered a big win in wire reporting. It was unclear how or why, but they consistently won by wide margins.
As it turns out, the bank released data at a scheduled news conference in its main office. The reporter, by chance, had been picking the book earlier, at a side street office a few blocks away from the main bank building.
It was just sheer luck that the delivery truck guy bringing the bank books stopped at that smaller office first. He probably went to get a Coke after that, stopped off to go to the bathroom, then drove over to the central bank, where a pack of journalists sat waiting for at least an hour longer.
Moral the story: Data has no mind. It moves the way it moves. You can pay umpteen billion bucks for a high-speed whatever and still be contingent on a delivery guy stopping to get a Coke. Think about that next time you decide to try day trading the news.
If you’ve already moved on from the odd illusion that you are somehow an actor in this stock market — that your hopes and dreams matter to an asset’s price — it’s time to consider riding the market instead with a solid, well-planned portfolio that can withstand a changing environment and still build wealth.