From Carrier Pigeons to Computers, ‘Big Money’ Always Had the Edge. Until Now.
From Carrier Pigeons to Computers, 'Big Money' Always Had the Edge. Until Now.
Picture the fastest trader on Wall Street.
You might imagine a person in a crisp button-down and tie, talking furiously into a headset, eyes darting between stock charts on a dozen different monitors.
But what if I told you that the fastest trader is not a person, but rather a computer code?
I'm talking about the algorithms used by institutional investors and hedge funds that automatically execute trades based on a set of predetermined conditions. These algorithmic trades generate an estimated 60% to 75% of all U.S. trading volume, and hard as you may try, there's no way you can can compete with the speed at which they make decisions.
Algorithmic trading has been on the rise in recent years, but it's just one recent face of a trend that has existed as long as investing itself: Wall Street has always used technology to gain an edge not available to the retail investor.
That point of "Big Money" always finding an edge was crystalized even further when I was chatting with my colleague and one of TradeSmith's newest finance experts, Jason Bodner, Editor of Quantum Edge Pro. He told me about a time 13 years ago when he saw firsthand how Wall Street pros were deploying these "technology edges."
* The investment results described in these testimonials are not typical. Investing in securities carries a high degree of risk; you may lose some or all of the investment.
Back in 2010, Jason received an individual email that contained 600 news stories each day so that he could pick out noteworthy themes and generate investment ideas.
After hearing about that email Jason received, an acquaintance on Wall Street asked our newest TradeSmith expert if he could receive that email to have access to all those news stories.
Jason jokingly warned him that there would be no way he could read every one, but his Wall Street acquaintance had no interest in reading any of them.
That Wall Street pro had created an algorithm that would run through the positive and negative headlines being published about the macro and micro investing environment and spit out a consensus about how news outlets were portraying investing.
The algorithm would serve as a sentiment indicator to project how the public would invest, because if the public keeps reading it's a good time to buy stocks, they start to follow that advice.
With an indication of what average retail investors will collectively do, hedge funds can start investing accordingly and rack up huge profits.
This sounds like a system that could have been launched within the past few years, but again, this was happening in 2010... 13 years ago.
And it really shouldn't be surprising, because as I mentioned earlier, "Big Money" has always looked for – and generally found – that edge over you.
According to "Introduction to Financial Technology" author Roy S. Freedman:
In 1815, the Rothschild bank in London made a killing shorting French bonds, allegedly by deploying carrier pigeons to learn of Napoleon's loss at Waterloo.
In 1865, American robber baron "Jubilee Jim" Fisk gained his edge by sending speedy schooners to outrace mail ships with news of the Union victory in the War Between the States. He cleaned up when the Confederate bonds he'd shorted went to zero.
Over a century later, in 1990, Datek implemented a program that capitalized on split-second discrepancies in small-order trading systems on the big exchanges. Called "The Watcher," Datek's innovation eventually paved the way for the day-trading era.
Here in the internet era, that "let's-get-an-edge" obsession has turned into a kind of high-tech arms race where the stakes continue to escalate.
The relentless search for that investing edge is more important than ever in separating the winners from the losers.
And it's the professional "villains" – the bankers like Nathan Mayer Rothschild, the robber barons like "Jubilee Jim" Fisk, and the hedge-fund buccaneers of today – who traditionally reap the biggest windfalls.
They bend the rules to find that edge and rig the game to make sure they win.
Fortunately, that enraging reality can change thanks to Jason.
He is maybe the only person I know who can see where "Big Money" is moving and when — in real time. This is why multibillion-dollar quant funds paid him top dollar for his insight.
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TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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