Monday, August 8, 2011

High Frequency Trading

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High Frequency Trading (HFT) was the likely cause of the May 2010 "Flash Crash".  I took the event as a sign of instability in the markets and sold everything I had which was long (trending with the market).  More than a year later, the regulators appear to be in the pockets of these organizations, and don't see a reason for making changes.  Perhaps they believe that market "circuit breakers" will prevent any crashes from occurring.  I am not so confident.

For me, there are three take-aways regarding this issue.  The first, as Jim Cramer says, is I invest only in strong, liquid (largely traded), best of breed companies and Exchange Traded Funds (ETF's) although I don't sacrifice all of my potential growth by holding only dividend paying companies.

The second is, I don't use hard stop losses.  These are sell orders which are automatically triggered when the price of the security reaches the specified limit.  I know what my sell price is, and place a limited sell order when my investment reaches my target.

Notice I said limited sell order?  The third thing is, I do not use market orders, but limit the price which I am prepared to pay.  This applies to buy and sell orders.  There are other reasons for taking this approach, but HFT provides me with the biggest reason to do so.

Until the regulators choose to see High Frequency Traders for what they really are - stock market spammers - I can't afford to ignore the potential damage they can cause to my portfolio.

Has recent events caused you to make improvements to your approach?       

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