High Frequency Trading Taking Us Back to the Roaring 20′s

Love this chart from James Montier at SocGen. It maps the average holding period for a stock over the last 100 years or so (give or take a decade). Amazingly, we have only just returned to those happy years of our grandparents.

Average holding period in years NYSE stocks

Okay, so we can assume some of the motivation for the ‘quick-turn’ in the 1920′s is the same as our recent past. In a raging bull market, everyone is a willing punter – buy today and sell higher tomorrow.

But does that mean that we are going to return to the more somnambulist pace of the 1930′s and beyond? Perhaps not…

There is a new gun in town and he goes by the name of HFT. He is quick-witted and a lot faster than mere mortals. He is a machine – literally.

The computational power that has amassed around us has been brought to bear on the financial markets. If you buy a share on the stock market today, chances are you have bought it from a computer.

The genesis of HFT (or high-frequency trading for the acronym challenged) was the idea that the bid/offer process of making a market is essentially mechanical…I can attest to that having sat on a spot currency desk in the days when it was manual labour.

But it doesn’t stop there. Now we have machines that will take their lead from the price action in the market. You put a bid to buy some shares, and a little bot will jump in ahead of you for a penny or two. Now the machines not only make the market, but they also try and pre-empt it.

So life gets faster once again. You might invest for a lifetime – these machines laugh at your fat fingers and timid mortality. They are all about the quick buck. I guess its a good thing?

In-house Analyst
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