Poor Richards Report
Chapter 12
Computers Gone Wild
Voyager 1 was launched from Cape Canaveral in 1977 and is now at the outermost layer of the Heliosheath- which is in the outer edges of a vast region of our Galaxy! The signal from Voyager 1 takes 18 hrs. to reach Earth. Radio signals travel at 186,000 miles per second. When Voyager 1 took pictures of Jupiter it took about 15 minutes to receive the pictures back on earth. That would be considered ridiculously slow by today’s standards.
With the speed of the internet today it is almost possible to predict the future. We are entering the “fast forward” area of the Heliosheath of the world wide web. We are going where no man has gone before and using other people’s money.
High Frequency Trades (HFT’s) can trade or use critical information in nanoseconds- ahead of legal announcements or orders- to circumvent legal transactions for a profit. They say it is only a few cents worth. Multiply a few cents by several million shares.
A misguided graduate student intent upon making a fortune has discovered or invented the magic formula for making quick profitable trades based upon price only. Little thought had been given to the long term consequences or merits to this program.
DEFINITION of High-Frequency Trading – HFT:
It is a program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. High-frequency trading uses complex algorithms to analyze multiple
markets and execute orders based on market conditions.
Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds. As of 2009, it is estimated more than 50% of exchange volume comes from high-frequency trading orders.
Let us estimate that just 1 billion shares trade and the cost is .0015 per share. That comes to $150,000 for each billion shares traded that year. That is absolutely gross. Outrageous.
Now let us look at JP Morgan’s manipulation of the silver commodity market, which has been well documented by various respectable research advisors.
Since trades are done in decimals instead of fractions, computers now list all the offerings and bids on a large computer screen. When the bid and offerings match a trade is made. It is done by the computer and each party is informed.
Now as silver starts to move up in price, and in “nanoseconds” a monstrous amount of sell orders appear. There might have been 10,000 contracts to buy and all of a sudden there were 50,000 contracts to sell.
The computer traders see this and realize that they will be swamped with more than they can handle and yank their bids.
We may assume that JP Morgan Chase has sold short at higher prices and at prices before the sell orders were displayed upon the computer screens. Please remember, dear reader, that commodity trades are usually done on low margin requirements and a slight move the wrong way can wipe one out quickly unless you have deep pockets.
So now in mere nanoseconds the offerings are withdrawn after a few trades and the price has tumbled one again.
The fines JP Morgan have received are peanuts to the larger amounts that they have made circumventing the law in the grey area of ethics.
If one doubts what I have been writing about all one has to do is go to Ed Steers’ blog to receive his free daily reports on the precious metals markets. It is one of my first reads every day.
The computer can be used for many positive means, but also must tempered. The police and armed forces are allowed to use weapons for our protection, but bank robbers don’t rob banks with guns anymore. They use computers.
ll