How High-Frequency Trading Machines Are Taking Billions Of Dollars From Retail Investors Each Year

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Wall Street may have an overlooked little secret they don't want you to know.

High-frequency trading costs global stock-market investors billions of dollars each year, according to an academic study by the Quarterly Journal of Economics. 

This academic study is believed to be the first of its kind that actually measures the cost of trading machines to retail investors. 

BuyAlerts analysts calculated that the total amount taken from retail traders is on the order of more than $5 billion dollars per year. This is due to the latency arbitrage creating about a 17% premium on the cost of liquidity for investors like you. 

So, What is High-Frequency Trading?

Machine trading has turned into a Wall Street’s version of an arms race, leaving ordinary traders far behind. It comes down to who can acquire market data signals and use machine learning to execute this data the fastest.

By taking human emotion-driven decision-making out of the equation, firms can profit by exploiting market conditions that are indiscernible to retail traders. In this new world, machines are capable of identifying market patterns and executing buy and sell orders within milliseconds through algorithmic trading.

Machine trading is so wildly profitable that CNBC recently reported that “80% of the stock market is now on autopilot.” More incredibly, a study showed that around 92% of foreign exchange trading is performed by machines rather than humans. 

Is It Time To Make Machine Trading Accessible To Retail Traders?

No longer limited to quant shops, Wall Street is now using machine learning to serve its elite clients. Citigroup uses machine learning to make portfolio recommendations, and it shares data that was previously available only to those with a “black book” of connections. For example, Citi’s machine can reveal what other investors are doing with their money by anonymously sharing investing moves made by clients all over the planet.

“Traditionally that kind of information was sourced from your network. You might have had a few coffees or heard about it over a cocktail,” Philip Watson, head of the global investment lab at Citi. “Now, we can share insight that is very valuable.”

Moreover, machine learning can analyze gigabytes of data to read and react to financial markets rapidly. Humans simply can’t match the speed or durability in trading profits as well as machines. Emotional irrationality also can make investors blind to new, groundbreaking investment ideas. 

Plus, a volatile market could cause investors to become a victim of their emotions. Machine and algorithmic trading models don’t have that disadvantage. They make impartial judgments to guide investors toward rational decisions. 

“It takes emotion out of it. Everything is rational,” Mike Chen, an equity portfolio manager at Boston-based PanAgora.

Therefore, the trend is clear. Even though the machine already makes 80% of the trades, the technology will continue to play even bigger roles in the future. BuyAlerts analyst Robert Mason said, “The innovation in machine learning will make the financial industry unrecognizable in a decade.”

Unfortunately, most retail investors don’t have access to machine learning algorithms or a team of hedge fund traders and analysts. After all, it’s the novel investment idea that brings disproportionate returns. 

Take Bloomberg Second Measure as an example. It measures real-time credit card transactions in big companies. Hedge funds can use that insight to estimate whether a company is growing or not. Can retail investors get that data? Not if they can shell out tens of thousands of dollars just to purchase that service. 

BuyAlerts believes it’s critical to make machine learning and live trading accessible to retail investors. Investing without a machine is like bringing a knife to a gunfight on Wall Street. 

Best-selling author Michael Lewis of Flash Boys claimed, “The stock market is rigged! It's rigged for the benefit of a really small handful of insiders. It's rigged to ... maximize the take of Wall Street, of banks, the exchanges and the high-frequency traders at the expense of ordinary investors.”  

Does that sound fair to you?

However, it isn’t as simple as downloading an app on a computer. You’d need a data scientist to test and tweak algorithms, an army of engineers to code software, and a “big idea” expert who can read data and interpret them into actionable insights. 

A new 2022 survey indicates AI adoption continues to soar among technology leaders like Refinitiv, BuyAlerts, Capital IQ, and Bloomberg: 57% of all respondents report an AI adoption in at least one function, up from 50% in 2020. The newer results suggest that AI machine adoption since the pandemic has accelerated as retail traders adopt the new technology to save time, money and generate alpha.

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.