In an attempt to limit the impact of fast-trading robots, the New York Stock Exchange (NYSE) is imposing a news embargo for listed companies in the minutes after the market’s 4 p.m. (Eastern) close.
According to a Wall Street Journal article, the NYSE, a unit of Intercontinental Exchange Inc., plans to prevent firms from issuing news releases for up to five minutes after closing time, according to a regulatory notice it released last week.
The article states that the move is a bid to protect NYSE’s closing auctions from sophisticated trading algorithms that scan English-language text in search of signals to buy or sell stocks. The auctions determine the end-of-day price for thousands of NYSE-listed stocks.
The problem, according to the NYSE, is that sometimes companies release important news just after 4 p.m. (Eastern) but before the exchange has published their stock’s closing price. When that happens, it can lead to “significant investor confusion” and bursts of volatility.
Contributing to the problem is the fact that the NYSE still runs an old-fashioned trading floor, with human traders called designated market makers (DMMs), who oversee the closing auctions.
According to the article, all-electronic exchanges such as Nasdaq can conduct the closing auction nearly instantly, but at NYSE it often takes longer. That is because DMMs can choose to close each stock manually or electronically.
AAII Weekly Survey Question
Algorithmic trading and high-frequency trading (HFT) has received a lot of publicity, not all of it flattering, in recent years. Much of this stems from the “flash crash” of 2010 and Michael Lewis’ book Flash Boys: A Wall Street Revolt.
To get an idea of what our readers think of algorithmic trading, our latest weekly survey asked the following:
Do you think algorithmic trading is good or bad for the stock market?
Here are the results:
In all, 1,389 readers responded to the question.
The results are kind of what I expected. The majority of readers believe that algorithmic trading increases volatility in the stock market and, thus, it’s bad for the stock market. However, beyond the strong negative sentiment toward algorithmic trading, nearly one-third of readers don’t know if algorithmic trading is bad (or good) for the stock market.
If you are interested in learning more about high-frequency trading, the CFA Institute released a policy brief on the subject that contains its opinions on the topic. As a CFA Charterholder, though, I do not necessarily agree with the opinions contained in it, nor does AAII necessarily support those opinions.
Only 8% of readers see algorithmic trading as benefiting the stock market, either through boosting liquidity, lowering trading costs or boosting returns. Slightly less than half of the respondents, 48%, said that an interest rate increase at this time would be good for the economy.
Weekly Special Question
To gain a better understanding of what our readers think about algorithmic trading and its impact on the stock market, last week’s special question asked:
In what ways do you think algorithmic traders help or harm the stock market?
In all, 142 readers submitted a response. We received 127 responses to this question.
Similar to the results of the weekly survey, the majority of responses referred to the perceived negative impact algorithmic trading has on the market by over a 3:1 margin. The biggest “downside” to algorithmic trading, according to the respondents, is that algorithmic traders have an unfair advantage over individual investors.
A number of readers also believe that algorithmic trading has a destabilizing effect on the stock market or increases volatility. Others believe that algorithmic trading disrupts or manipulates stock prices.
Another group of readers thinks there is too much of a chance another “flash crash” will occur due to algorithmic trading.
The number of readers who took a neutral stance on algorithmic trading outnumbered those who feel it benefits the market by nearly 50%.
Among those who think algorithmic trading is good for the stock market, most feel that it helps bring liquidity to the marketplace.
Here is a sampling of the responses to the special question:
- “[Algorithmic trading is] only good for institutions and hedge funds, but not for the average investor.”
- “It [algortihmic trading] is good for the market because it is another stupid way for people to speculate in the market. Speculation increases the chances for long-term investors to make money in the market.”
- “This activity should be banned and is harmful to the individual investor who has no way to react to what amounts to computer-versus-computer warfare and the resulting chaos in stock prices.”
- “[Algortihmic traders] help by balancing and spreading large trades over a set period and as a result should have less impact on the fluctuation of cost on the open market upward or downward.”
- “Hurts individual investors because we don’t have equivalent means to compete. It takes away my ability to discover pricing differences between value and market price. This technique is yet another way of disadvantaging the individual investor.”
- “They lower the cost of trading. Other than that they do nothing for the market.”
- “Many algorithmic trades produce market volatility that feeds on itself. An example is the ‘flash crash.'”
Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at www.aaii.com/memberquestion.