Are You Vulnerable to Computerized Markets?
It's like a scene right out of The Matrix or The Terminator. Machines are making life and death decisions every nanosecond where the reality perceived by most humans is really just a simulated reality, a mock set filled with human "actors" to provide some sense of control, when in fact, your financial future is really at the mercy of machines in characterless buildings.
What I'm describing is the U.S. stock market floor, not of the future, but of the present. Places that use to be filled with humans taking orders to buy or sell are now mere shadows of their former selves where computerized programs run the show.
The NYSE just six short years ago use to receive 70 percent of stock market orders, but now only handles about 30 percent. Who's handling all of that market volume? Firms like Direct Edge (which was created by Knight Capital) are where the trading volume is heading. What may be surprising to most investors is that the "new" U.S. stock market is really housed in server warehouses in locations like New Jersey and Missouri void of all but a few dozen humans and filled with computer servers handling as many as 10,000 trades...a second. Even the NYSE has succumbed to this new reality by creating their own digitized exchange while maintaining a trading floor occupied by human traders, but even that floor is now mostly electronic.
Computers handle the most of the trading activity, so what?
I'll never forget my first visit to the Nasdaq stock exchange for TV interviews. There were hardly any humans there. I felt like I was looking behind the green curtain in the Wizard of Oz. The great Oz was just computers and screens. An unnecessary, elaborate, fabricated stage designed to give investors comfort about the stocks they own.
The next time you enter a trade to buy a stock or fund, forget the notion that an actual human is filling your order While the digitization of U.S. markets has certainly led the way to cheaper and faster trading it also comes with side effects. Whether it was the "flash crash" in 2010 where a "computer glitch" caused massive losses within a few minutes of trading or more recently when Knight Capital lost $440 million within a 30 minute period because of yet another "glitch," it's evident that you as an individual investor should take action and protect yourself from rogue trading bots.
How do I protect myself?
One word; diversify. I don't mean diversify like your advisor says or how Wall Street claims you should. I mean something I've termed "True Diversification." I define true diversification as an "asset allocation among truly non-correlated alternative investment strategies and markets to generate an absolute return, regardless of market volatility." So, I think the best strategy in an era of de-humanization in the equity markets is to diversify among many different markets and many different uncorrelated investment classes. How many markets and investment classes should you include? As many as possible. A real wealth advisor/money manager should diversify you among 100-150 different markets. So, when the next "flash crash" happens you're as prepared as humanly possible.
Robert Russell is CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to FOX Business and CNBC.
Securities offered through Kalos Capital, Inc., Member FINRA, SIPC. Investment Advisory Services offered through Kalos Management, Inc., 3780 Mansell Rd. Suite 150, Alpharetta, GA 30022, (678) 356-1100. Russell & Company is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.
