The Robot Trader

I had a most fascinating dinner last night. Among us was a Chicago pit trader, who has been day-trading the various markets for the past 18 years. But recently, he left the USA for Asia, locating his family in Chiang Mai, while he shuttles down to Singapore to day trade.

Singapore was the obvious choice as she has the infrastructure to conduct the high speed trading, and still close enough to Chiang Mai, where his Thai wife and family lived. But why the move to Asia in the first place? He could not successfully compete against the robot traders.

Robot Traders? These are the emotionless super computers that trade using advance algorithms that could accurately predict short term fluctuations in prices. Now, computerised trading has been around for decades, so what has changed? Technology and Stock Exchange rules.

Technology has evolved so quickly that algorithms began to learn and mimic human behavior. The speed of executing a trade also got faster. But the most damning development was the Exchanges' decision to sell information to their clients about impending orders for a fraction of a second before the trade is routed to rival platforms.

But with these super computers, the information is processed at an estimated speed of 300-millionth of a second, faster than the time taken to route this information to the exchange platform. Hence, super computers could "front run" the order and have an "unfair" advantage over the other traders. This was technological insider trading, but allowed by the Exchanges. This was also known as Flash trading.

Consequently, day traders began to stop trading as they were the ones at the receiving end. Complains of unfair practices reached the Congress, and SEC announced yesterday that they will plan to ban these practices.

In the meantime, many day traders have flocked to Asia, where robot trading is less apparent. Still, this is a timely reminder of how disadvantaged is the common man, in the world of day trading. In fact, this phenomenon has even infiltrated into the world of online poker. Financial Institutions have Poker Division whereby they employed high speed algorithms to play poker! Amazing but apparently true. That's probably why I dislike computers.