Link: ready, set, arbitrage.
4% of last week’s trading “activity” on the US stock markets was the result of a mysterious algorithm whose motive is “still unclear”. Conspiracy theory, anyone?
And to be clear, what we mean by “trading activity” is that the algorithm was putting in bids then cancelling them in 25 millisecond bursts. This “just goes to show you how just one person can have such an outsized impact on the market”, according to Eric Hunsader (the head of Nanex, the “Number 1 detector” of trading anomalies on Wall Street*).
The suggestion is that these algorithms slow down the system so that computer traders (who are putting the algorithm in place) can make arbitrage profits off the timing differences in between bids and offers clearing… I’m not entirely sure how that works. But I can see how knowing the quotes just before everyone else does could allow you to briefly front-run trades.
There are lots of people suggesting that the US should tax these algorithmic bastards to get rid of them.
But what I think is interesting is how the share price can hinge on the activities of a few traders, which is something that I’ve been thinking about for some time:
If you look at a quoted share-price, what you are looking at is the price at which the share last traded. And it could have been a trade for only 100 shares of a company with 100 million shares in issue. If that’s the case, is the quoted share price really the value/price of those shares?
Not at all – it’s the price that the last buyer and seller agreed on. And depending on the individual circumstances of those buyers and sellers, the share price probably had nothing to do with the “value” of the stock and everything to do with the cash flow requirements of the traders. And/or their sentiment. Or their investment policy mandate.
At this point, I usually stop thinking because it makes the world feel very fragile and volatile.
But I think it does mean that looking at the share price without knowing the volume of the last trade is about as informative as using the map of New York to navigate yourself through Stockholm.
It’s just a thought.
*I’m not sure who gives out that award. It sounds a little self-awarded, if I’m honest…