I read this article in the Investor’s Business Daily from December 27 about the current situation with Waymo, which is Google’s automated car division, and it made me think about where we are with automated cars vs. where we are with automated stock trading. There are parallels.
Cars
Many of you may not have yet seen an automated car on the road. They are being tested only in a certain few cities. Tested is the key word. When you see one, you know it is an automated car. Their appearance is unique. They don’t just go around driverless – they are not that advanced yet. There is a driver ready to take control as necessary. The gist of the IBD article I cite is that the cars still require drivers and that we are still several years away from being able to be fully autonomous. When you are talking about cars speeding down the road, lives are at stake, and so the whole business of automated driving is highly regulated, probably correctly so. You wouldn’t want to go out and drive among a road full of untested, unproven autonomous vehicles not knowing consistently which way they are going to turn next, would you?
Trading
Well, in a way, that’s what we are doing now in the stock market. We are trading in a market world where it is estimated that over 80% of trades are automated. Any of us who make trades are trading against these trading robots. By robots, I mean full autonomous – no driver behind the wheel when it is making trades. Yes, there is a “mechanic” who put together the robot, and the trading robot can go back to the shop if it is leaking oil, but the robot trades on its own without human intervention. In this sense, automated trading is ahead of automated driving. Because only money is at stake, not lives, there is little regulation. Nor should there be.
Automated trading is one of the primary reasons why we have increased volatility in the recent past. Unfortunately, if you are waiting for roads with less traffic, automated trading, algorithmic trading, is here to stay, and will only increase, in my opinion.
What To Do?
Here’s the good news, for non-robot human traders: There are ways you can still make money in the stock market. As with driving, you have to know the rules of the road. With most automated trading, and most of the volume related to automated trading, the objective is to capture fractions of a penny in profit. Trade millions of dollars at a time, but make only small fractions because these fractions are “sure things” for these types of traders. If you, Mr. or Mrs. Human Person, wants to make a trade, don’t do so to try to skim pennies. Don’t trade in the same league as the robots. Instead, have as your objective a fundamental or technical understanding of what you are buying and intend to hold it for a longer period of time. That way, your “slippage”, or the the fraction that you might pay that is higher than the listed price, won’t matter as much. You are looking for profits larger than $0.0001 or something like that, so your entry price isn’t that important. It might irritate you that some robot out there might get a slightly better price than you on a trade, but then again it might irritate you when some automated car cuts you off on the road. What do you do in both cases? Be upset for a fraction of a second, but then carry on to your destination.
IMO
The stock trading world has new rules of the road due to automated traders. You can still be successful with your investing if you understand how the new roads work. Keep your cool, and don’t be distracted.