They Can See You Coming….

25. July 2009 by Dan Walkow, CFA, CMT.

Ever feel that you get the raw end of the stick when you trade stocks? When it comes to the quality of fill prices the the odds are stacked against you unless you understand how the system works.

Did you know that stock exchanges “sell” information where sophisticated traders and their computers “can see the order flow” in advance? They can see you coming!

These days the hot thing is computer assisted or “black box” trading systems which analyze order flow and take advantage short term fluctuations in the market.

These are known as “Algo systems” and are used in Canada and the USA by institutional players who, with these “rapid fire” computer trading systems, can clip a few points at the expense of unknowing traders and especially individual investors.

Individual investors, to be successful, have to understand that at any point in time there are professionals and moreover computer systems on the other side of the trade who can see you coming!

Here is a recent piece in the New York Times which explains how it works;

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets. More here.

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