Will “Robot Trading” Halt The Resource Boom?

There’s a new panic infesting the minds of investors.

No, I’m not talking about figurehead Bill Gross’s recent comments about “the cult of equity dying.” Believe me, one man’s comments about the death of stocks wouldn’t stir up this kind of fear.

Instead, I’m talking about a sea-change in the market. It has to do with what some are calling “robot trading” and as you’ll see this new trend is set to affect the way you and I trade for years to come.

More importantly, today there’s a way to make sure you aren’t affected by the robo-trades. As you’ll see it’s pretty simple…

I first realized this “robot” story had gone viral when my Brooklyn-based sister sent me an odd email.

There wasn’t even a hello in the body of the email, instead just a link to a sticky story posted by a chief financial writer at the Huffington Post.

“Wall Street Robots Have Taken Over The Market” the title exclaims.

This should be good, I thought to myself. The title sounds more like science fiction than investment-grade editorial.

But what I found was an important story that you need to know. It has to do with the advent of “high frequency trading” or “HFT” for short.

“High frequency trading” according to Time Business, “is a catch-all term that describes the practice of firms using high-powered computers to execute trades at very fast speeds – sometimes thousands or millions of trades per second.”

HFT is a fundamental shift in the way the markets function. It’s creating pitfalls for investors, too.

To jumpstart our discussion, take a look at what my sister sent me. In a nutshell, the image below shows the volume of HFT in the market, starting slow in 2007 and gaining some real traction in late 2011…

Source: Nanex

As you can see from the image above, the “robots” have indeed increased their presence in the market place over the past few years – note the near non-existence of HFT in 2007.

Taking it a step further, Time Business questions if HFT is “Wall Street’s Doomsday Device?”

This “doomsday” concept is at the heart of the panic – and surely the reason my non-investment-minded sister sent the story my way. “Robots taking over” is always a catchy story, especially when you can back it up with volume data from the market.

But let me be clear, HFT isn’t the end of the stock market. Rather, it’s merely a change in the system…albeit an important one.

Not to get too cynical about the market – trust me I have some skin in the game just like you – but, you can think of the new addition of HFT to the stock market in the same way that fully-electronic slot machines hit the heart of Las Vegas in the late 70s.

At the onset of these fully digital, TV-screen machines traditional casino-goers were highly apprehensive. Although the new technology was a pleasure to operate there was rampant mistrust from casino patrons. Back then it begged the question: would the computers take over and systematically take people’s money?

Well, as you and I know, the new digitized machines did little to change what was really happening behind the scenes (they call it gambling for a reason, right?) Instead of a mechanized computer that takes your money it was a digital one. Heck, not many average Joes really know what’s happening behind the triple cherries in either case.

Point is, the new transition didn’t stop people from frequenting casinos. In fact, it only made the whole thing bigger. It was easier for casino’s to manage and more enjoyable for patrons to stuff quarters in – a proverbial win/win.

To be sure, we’re NOT gamblers. The stock market isn’t like throwing a quarter in and pulling a lever. In fact, over the years it’s been quite the opposite — many prolific buy-and-hold investors have made a killing on equities, same goes for average Joe’s like you and me. That’s not something that will change because of high-speed computer trading…remember, the stock market is much more than just computer codes.

But with the advent of HFT comes a new set of pitfalls that you must be aware of.

First and foremost, you need to know where you money is. Much like any Ponzi scheme operator, if you give your money to an investment firm to “manage” it for you, it could very well be put into an HFT-based computer system.

One bad day or computer glitch could get you a phone call saying “our algorithm failed, and your account has been cut in half.”

You’d probably be left thinking “what the heck is an algorithm!?”

But to be clear, this is the same as a Madoff-esque boondoggle or the “mortgage backed security” catastrophe in 2008. Both cases leaving you in a “what the heck?” state of mind.

So when I say know where your money is, I mean know where it is and exactly what it’s being invested in. If you can’t understand what your money manager is telling you, allow me to be the first to tell you to fire his sorry ass. A fool and his money are easily parted – and making sure you have tabs on your cash is first and foremost.

Second up though is something that we concentrate on here at Daily Resource Hunter: make sure you are investing in physical commodities with real value.

Gold, silver, oil, gas, corn, fertilizer and other commodities should be the backbone to any hard asset portfolio. Physical assets like this will ALWAYS have value – and that can’t be ruined by a computer glitch.

Along with the physical commodities themselves, companies that efficiently and profitably produce these assets can also lead to substantial investment gains.

While rumors swirl about computer trading and stock market “doomsday”, I suggest you reassess your portfolio and make sure it’s reinforces with hard assets. The buzz of computers in the stock market won’t do anything to affect the long-term prospects we find here at DRH – heck, it may even give us a better entry price. (Heh, Instead of buy on the dips, we’ll say “buy on the glitch.”)

And, if you’re really worried about the computers taking you for all you’ve got, now may be the time to invest in a few ounces of gold bullion. The day a computer can take a handful of gold American eagles from me I’ll give up the investment game for good.

Till then…keep your boots muddy,

Matt Insley

Will “Robot Trading” Halt The Resource Boom? was originally featured in The Daily Resource Hunter. Check out the newest Daily Resource Hunter research video “The Price of Gas Explained”.

Article Title originally appeared in the Daily Resource Hunter (www.dailyresourcehunter.com) At the Daily Resource Hunter our approach to research is different. With our boots on the ground, we travel the world looking for the most lucrative resource opportunities and deliver them to you in a daily email newsletter. For more information visit us at www.dailyresourcehunter.com)