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As AI, computer algorithms and robo traders take the stage in finance, short-term movements have taken the stage over long-term investing based on fundamentals. With more than half of all trades being completed by HFT algorithms and more money going to trading infrastructure based on speed, investing is looking more like cryptocurrency mining.
Up to 60% of trading is done by algorithmic trading utilizing high-frequency trading programs that profit off of small movements in equity prices.
The use of algorithms has focused trading profit models from choosing growth or value stocks into watching for small movements in share prices and capitalizing on these movements. This takes the emphasis off of valuation and moves it to speedy technology. It is similar to mining cryptocurrency, in that computers compete to solve problems.
In the future, trading may simply be a technology arms race. There will always be a place for value and growth stock picking, but the real money is made trading large blocks of stocks behind a computer with a fraction of a cent difference that nets a profit and creates arbitrage.
Read more about HFT/Algo Trading at Investopedia here:
https://www.investopedia.com/articles/investing/091615/world-high-frequency-algorithmic-trading.asp
This new development scares me, as computers make mistakes, especially when multiple systems and algorithms interact. One algorithm may attempt to hand a position to another and drop the ball, leading to a wild and unexpected movement that harms an entire sector. If these algorithms make complex option strategies and use leverage, this could magnify the effect.
The future is here.