Kass: Revenge of the Nerds
When every machine is processing the same data, with the same algorithms or information access, they all make the same decision at the same time.
Welcome the stair-step price moves.
Welcome the flash crash, which was destined since the death of human floor brokers and the proliferation of high-frequency-trading strategies (served up in a vacuum of derisked investors).
-- Doug Kass (Aug. 2, 2012)
During the past week, a technology glitch resulted in a $440 million loss for Knight Capital Group (KCG) -- that's $10 million of losses per minute! -- sending the well-known market maker scrambling to find capital or partners in order to avert bankruptcy and to continue to stay in business.
"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."
-- Warren Buffett
To me, the most frightening element of the Knight Capital situation was the speed in which the company lost nearly a half-billion dollars, raising the question as to whether the pursuit of profits in technology (whether it is in market-making or high-frequency trading) is leading us uncontrollably down the road to ruin.
Certainly, the proliferation of double- and triple-leveraged ETFs, which further influence and exaggerate market moves, doesn't help much either.
From my perch, the almost unbridled and nearly unregulated and unsupervised technological trading growth has unintended consequences that substantially offset the benefits of liquidity and lower transaction costs; now they are jeopardizing some of the same technologically intelligent companies that they are supposed to benefit (e.g., Knight Capital Group) and are further alienating investors (individual and institutional) who have already grown suspicious that the game is rigged or just unplayable.
The September issue of Wired magazine touches on some of my concerns far better than I could ever do.
Read it at your own risk.
I sure wish that our inert and inattentive SEC and other protective regulatory bodies would read this and react before it is too late.
I am afraid we have seen only the tip of technology's iceberg and its potentially adverse impact on our markets.
The worst is probably yet to come.