Tuesday, August 28, 2012

Investing in Shares and market controlled by Stock robots


One reads in news media all the time about the share price movement – typically, it would read - BSE benchmarkSensex declined marginally by over 14 points in early trade today as participants trimmed positions amid a weak trend in Asia.  The 30-share barometer, which had lost 104.40 points yesterday, fell by 14.04 points, or 0.09 per cent, to 17,664.77.  Stocks of realty, auto and consumer durable sectors declined on selective selling.  Similarly, the wide-based National Stock Exchange index Nifty fell by 7.40 points, or 0.14 per cent, to 5,342.85.  To the na├»ve common man, it would defy logic to think that the traded volume can even outsmart the overall no. of shares of the particular company. 

Sure, you know of shares and many would indulge in investing in Shares…. Read somewhere that in modern times, people no longer invest in shares but simply trade in them !  Decades back people would painstakingly collect loads of information, calculate their P/E and determine the value of the share before trying to buy them in secondary market – which by itself was a tedious process.  Have you ever been to the market of yore or at least seen them on TV – it was chaotic – if you had wanted  to buy 100 shares of  BCD Co – you would place order with a broker [who might insist on keeping a margin of money with him to enable that purchase]; when the market opens, with agents shouting at top of their voices in cacophony, your broker would have to identify another broker trying to sell the same shares at the rates you intended and deal was struck – then the physical scripts would be  handed over, you paid the money and then applied for change of share certificate – another cumbersome process to become eligible for a dividend or a bonus share !!

Life is not all that tough now ! - Stocks today are bought and held for seconds as the operations are computerized and you may not even need the broker intervention, if you the tools and registered yourself.  The deal is also transparent and with the registration, any transaction in your name is completely logged.  There is no physical holding of shares and transfer is no longer the feared process.  

There was a time when there were local exchanges like Madras Stock Exchange, Mumbai Stock Exchange, Hyderabad Stock Exchange et al.,  which ruled the roost.   The setting of National Stock Exchange in 1991 vastly altered the scenario.  NSE,  located in Mumbai is the 16th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading.

There are some advanced players who use Stock Robots, automated "robot" that analyzes the best stock by comparing historical performances of certain stocks with the current performance to predict the future trends and potential. The powerful programs have sort of replaced the human brain in market analysis and trading.  There is fear in some circles that Robots have already made the gambit of ruling the World by having the share markets in their crutches.  Elsewhere in Australia, in the Share market, there is no longer – it is man to man communication – not even machine to man – almost it is between machine and, …. Another machine. Self-automated algorithms can generate 150 trades in the blink of an eye and, unlike ordinary investors or even the big funds, have been given the ultimate privilege of plugging straight into the ASX's computer. ASX announcements and news wires such as Bloomberg are fed straight into the algorithms. They can read, digest and act on the information infinitely faster than any human mind can even imagine. 

In any market the insider benefits for he gets to know the valued information much before you and hence can use it to distinct advantage.  The robot trader similarly can do the same damage, even if the information received is only milli-second earlier, getting the few extra seconds to act, or jump ahead of any trades that had been frozen. It is unfair or uneven playing field.  There are reports that the corporate watchdog, the Australian Securities and Investments Commission (ASIC), is having doubts, except, like everybody else, it isn't too sure exactly what the computers are up to.  They can run rampant with a faulty algorithm until somebody pulls the plug, but not before the market has been shaken and confidence drained from it.  The robots can undercut a seller or overbid a buyer being there first beating the rest with its speed.  Worse still is flooding the market with fake bids, suggesting something's happening and there's momentum, only to cancel them a nanosecond before the market opens. Once, that was considered market manipulation.  All that would make  the market much more volatile and unpredictable.  

While it is interesting and can be luring to buy shares, there is no point in putting all your eggs in one basket viz., don’t buy too much of a single share or buy shares of a particular group or industry and small time is not going to yield big time profits !

With regards – S. Sampathkumar.

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