I suggest you watch the fascinating video above right now and then come back to this text.
Okay, have you watched it now or did you not bother? Seriously. Watch it now please. Right now!
The robot in the video can actually see what you are about to do and beats you to the punch, each and every time.
I started noticing something similar a few years ago when buying or selling stocks. For example, often just when I placed an “at market” buy order into the market I’d notice the price start to creep up on the screen in front of me. I would receive the confirmation of the trade done at several cents above what it was when I placed it after which the price of the stock came back a few cents to the original price. No biggie right? Well it was a pretty big biggie if I was trading large volumes of stock and if I was doing a lot of it. Those cents started to add up and it started to give me the proverbial hump. For those of you not initiated in the meaning of the proverbial hump it means irritated, aggravated, ticked off, unhappy with the state of affairs in the world.
I started to complain to my traders and brokers, there are rules about best execution and I was beginning to think that I was getting taken for a ride. It started to become a bit of an obsession with me. To test this I then started to play around with limit orders, I’d place them slightly higher or lower in the order books and would sit back and watch. As I entered the order immediately the bid and offer would start to do a little jiggly dance, a bit like Miley Cyrus twerking, not a very pleasant thing to watch.
So what is going on in the markets? Just like the video above its about robots, black boxes, computerised, algorithmic and high frequency trading.
These things are just as quick as the Janken Robot and do exactly the same thing, except they take your money. When I say quick I mean super-dooper quick. What they do is calculated not in seconds but milliseconds. To give you an idea of what a millisecond is, it takes about 400 milliseconds for you to blink your eye.
To see the order book action and the executed trades the intraday charts you find on Yahoo Finance or Google Finance won’t show you what's going on. Any big price action that happens in the market shows up in a traditional intraday chart as a straight spike. What you need is a chart that breaks it down into milliseconds. This will show you what’s really going on.
The clever chaps at Nanex have done just that. Have a gander at the chart below. This is from September this year, from when the Fed released its decision to carry on with tapering, thus surprising the market. The chart below by Nanex is 150 milliseconds in time. As you can see, the move was over before you could blink.
As a human trader you would've had no chance. It was like lining up Homer Simpson against Usain Bolt. With you the human trader as Homer Simpson, Doh!
So you can see the similarities with the Janken Robot. There are players in the market who have access to information before others and thanks to technology they are able to trade on it warp speed. This by any definition is insider trading and they are able to front run other traders, getting their orders in before any human possibly can.