This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 4 July 2015.
There’s little doubt that the age of computerisation has radically changed our lives. Laptops, desktops, tablets, smartphones and even smart watches, all devices which have become part of everyday life. Where computers were once the size of large rooms and could only perform a single function at a time, the smartphone in your pocket can literally perform thousands of functions and at blindingly fast speed. The combination of computerisation and communication links like the internet means that we’re more productive and more connected than ever before. I can receive my work emails while sitting on a beach in Coffs Harbour, while a friend eating lunch in New York can unfortunately share a photo of their meal instantly with their entire social circle via Facebook or Snapchat.
As you might expect, computerisation and advances in telecommunications have also radically transformed the world of finance. Did you know that nearly a third of all share transactions on the Australian stock exchange are carried out by computers deciding to buy or sell? There’s no human input beyond setting the parameters by which the software will trade. It’s estimated that in the United States around half of all share trades are executed automatically by computers. Sophisticated algorithmic trading software monitors the market and makes decisions in less than a millisecond. In fact, so advanced has algorithmic trading become, some algorithms are able to predict share price movements 30 to 60 seconds in advance. Speed is crucial too. If you submit a buy order through your online broker, smart computers can see your trade coming and can jump ahead of your order, buying and then selling to you whatever you wanted at a slightly higher price. It might only be a cent or two higher, but done hundreds of thousands of times per day, the cents start to add up. Read ‘Flash Boys’ by Michael Lewis for a fascinating account of the rise of high frequency trading.
What does all this mean for you? Well the computers don’t care what the underlying share is – is it a bank, a supermarket or perhaps a coal miner? They have no sense of the underlying value of the business, treating every share as though it was simply a chip in a casino. This is where humans have an edge over their computerised counterparts. A share is a small stake in a business that actually makes or sells things or provides a service. In reality the value of these businesses does not change by 3% or 4% or 5% per day, regardless if the stock market price says so. So ignore the computer and focus on the underlying business – we are all humans after all.