Trade on a Handshake…and Enjoy the Good Life
Tom Kerr writing on trading…
There is a long history of Wall Street types sniping profits right out from under your nose, through insider trading.
But it’s not always a hot tip from a company executive or politician that gives them that unfair advantage. Most of the time they simply beat you to the punch.
The pony express, carrier pigeons, and the telegraph have all been used, at different times, to speed information along to big investors before the little guy wakes up and reads the news in the morning paper.
The strategy works especially well in the Computer Age.
About ten years ago I read about a brokerage that set up its trading computers right down the street from the New York Stock Exchange…not to be at a prestigious address to impress clients, but to transmit electronic trades faster than the competition…which usually includes you and me.
I didn’t know until then that the distance between computers can have a rather dramatic influence over the speed of data transmission. But if knowledge is power and time is money, whoever wins the race to the floor of the stock exchange gets rich…at the expense of those who lag behind.
That struck me as an advantage the big investors had that I could not compete against. A whole new technology had emerged, to ensure that the system was once again rigged against me.
After that I started focusing almost exclusively on stocks that do not interest institutional investors…so-called “small cap” stocks.
Big institutional investors – like the guy who may be overpaid to manage your company retirement fund – usually don’t dabble in these smaller stocks. Putting distance between myself and those big Wall Street types – and all their tricks of the trade – is more within my comfort zone.
My commitment to invest in stocks that are under the radar of the institutional players was confirmed when I read about an outfit that spent an estimated $300 million dollars to lay fiber optic cable all the way from Chicago to New York…just to speed up their trades.
They did so quietly, to avoid arousing the attention of Wall Street competitors…until they had successfully created an infrastructure more than 800 miles long. That was about 100 miles shorter and more direct than any existing telecom line between those cities. The final destination of the high-speed line – known in industry parlance as “dark fiber” – was an office right across the street from the mainframe computers that serve the NASDAQ stock exchange.
Dark fiber networks are typically known for ultra-low latency. Latency, in engineering terms, means the time that transpires between sending data and receiving it on the other end.
In this case, taking a 100-mile shortcut and using dark fiber shaved three-tenths of a second off of the data transfer speed. Plus, the line was set up as close as possible to the stock exchange computers…guaranteeing that their bids or sell orders would get there before yours. The whole transaction happens so fast that you never even see it, because the latency of their network outpaced yours.
When you’re trading stocks, hidden forces are betting against you…and winning. You may find it interesting to note that the word latency…which contains the word “late” within it…didn’t originally mean “delay.” Instead it derives from the Latin word latere…meaning disguised and hidden from view.
Today’s institutional traders utilize automated trading platforms and complex algorithms that enable them to execute trades so rapidly that they measure the times with atomic clocks calibrated to the speed of microwave particle vibrations.
In other words, they get in, get out, and count their money billions of times faster than you can say “one Mississippi.”
When everyone on Wall Street is doing that, it makes the stock market a volatile, unpredictable place. Price swings…and market crashes…can and do occur…with much greater frequency. The moves may have absolutely nothing to do with the underlying value of your stocks, but are instead fueled by automated trades executed at the speed of corporate greed.
Those guys who built their own transmission line from Chicago to New York make a fortune leasing bandwidth on it to institutional investors.
Sure, I admit it…I would love to capitalize on a piece of that action.
But at least I have managed to not lose my shirt and to generate honest, steady returns by investing – and living the good life – in the slower, more natural lane where fairness and a trusted handshake are still considered valuable assets.
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