My wife and I often listen to National Public Radio news as we sip our morning coffee in bed (one of the more lovely benefits of retirement). Often during the broadcast, punctuated in between the news stories, the reporters usually toss out a brief update about how the Stock Market is doing. The Dow is up x points, or the NASDAQ down by y. I often wonder, what is the point of telling me this information? In a matter of minutes those markets can completely reverse.
Worse yet is when the news then attempts to explain WHY the Stock Market took a particular rise or fall. Recently the market apparently fell on worries about the nuclear plant disaster in Japan. Oh really - how do they KNOW that was the cause? A few years back I heard a reporter attribute the market closing lower because President George Bush was having his colonoscopy. What the... ?!
The truth is that I don’t think anyone has the remotest clue why the Stock Market trends as it does. The media obviously pulls some current story out of the blue and attempts to attribute cause-and-effect to these fluctuations where there is none. Humans naturally expect reasons for why things happen, therefor, a causal effect is simply manufactured that has absolutely nothing to do with reality.
I became even more dubious about Stock Market trends after discovering that a huge majority of the trades executed daily are no longer done by human traders but by computers. The number of human traders on the floor of the stock exchanges has actually dropped by a large percentage.
As it turns out, a significant number of the buy/sell trade decisions are not being made by human traders - To a significant degree computers have taken over the buying and selling of stocks. I recently watched this story on the TV news show, “60-Minutes”. Companies have now invested millions in computer hardware and algorithms which can spot and act on trends within microseconds. Traders on the floor of the Stock Exchange is now old school.
Excerpt: It may surprise you to learn that most of the stock trades in the U.S. are no longer being made by human beings, but by robot computers capable of buying and selling thousands of different securities in the time it takes you to blink an eye.For me this has significant bearing on the entire purpose of the Stock Market. Companies used to offer investment in the form of stocks to raise capital in order to expand, grow and become profitable; thereby sharing the benefit through dividends to their investors. However in recent years I have been puzzled why it seemed the stock in one company would fall even when they reported profitable years; equally puzzling were the rises in stock prices of companies obviously languishing.
Today [the floor of the New York Stock Exchange] is still the public façade of Wall Street, and a television backdrop for reporters relaying financial news. But less than 30 percent of the trading is conducted there now, and the specialists and the noise of the floor are being replaced by the speed and quiet efficiency of computers and the action has moved elsewhere. 1.
Now I understand why – the decisions regarding the sale and purchase of a company’s stock have no bearing whatsoever on the viability, market potential or management of that company. Those buy/sell decisions are made within fractions of a second by automated traders who may likely hold a company stock it just purchased for only three minutes before it sells it.
The people behind this trend say this should have no negative effect on the small investors who like to play the stock market using their best analytical considerations about the viability of the companies they choose invest in. But if the prices are actually driven by the mindless millisecond musings of a super computer, how can you be sure the small investor is safe?
This one thing I do know, as NPR tells me the Stock Market is up or down so many points, by the time I finish my morning coffee, that information is old news.
1. How Speed Traders Are Changing Wall Street, “60-Minutes”, October 10, 2010