SMART INVESTOR: You're No Match For Algorithms


These days, it’s not just traditional media reports that can rock the stock market. 

Social media once again proved how powerful its reach can be last week, when hackers tweeted that the president had been killed from the Associated Press’ Twitter account.

The tweet set off a selling spree, and the stock market instantly nose dived –– only to bounce back minutes later, when the AP issued a public statement explaining the hack. 

This should serve as a warning to individual investors either considering or already finding themselves swept up in high-frequency trading: For the most part, you’re way out of your league.

Brenda P. Wenning, AdviceIQ contributor and president of Wenning Investments LLC, explains:

“If the White House explosions really happened, the algorithms that make decisions for high-speed traders would continue selling, leaving the average investor behind as stock values tumbled.

It shows how much the game is tilted against individual investors. The cacophonous floor trading that you see on television is passé. These days, high frequency trading algorithms initiate 70% of stock trades on U.S. exchanges. There is no way you can beat them.

Do you think you can come up with a good trade, log into your online brokerage and click sell? By the time the software debits your checking account and executes the trade, you missed the opportunity. During the Twitter Flitter, my own order entry screen was moving so quickly it was impossible for any human to react and make intelligent stock choices.”

The bottom line: These days, computer speed has become just about as as important for successful trades as good old fashioned know-how. And it’s one more piece of evidence supporting the notion that individual investors aren’t helping themselves by obsessively day trading. Not only have studies shown that day traders aren’t as successful as those who invest in passively managed index funds, but you’re begging your brokerage firm to pick apart any gains you might pocket with trading and activity fees along the way.

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