This Is One of the Most Important Lessons I’ve Learned in Financial Markets￼
My wife and I live a very Norman Rockwell-type life.
Perfect house, white-picket fence, raising some great kids, no financial stress, and realistically very little stress at all.
But it wasn’t always this way.
Shortly after the dot-com crash in the early 2000s, I became a much-envied – at the time – market maker on the Chicago Board Options Exchange (CBOE). I spent about a decade there, running around like a maniac down in the famous options pit… and I loved it. I lived it and breathed what I thought was the American Dream every day.
But unbeknownst to most at the time, a replacement for me was in the works. One that no one hired.
And I ended up losing my job to it after 10 years… feeling such a loss… and mainly because the replacement wasn’t a person. No one outdid me – algorithms did.
And now, they take up anywhere from 60% to 75% of all market activity each day. That’s billions on the move based on pre-set rules that govern how an algorithm – let’s be honest and just call them robots – acts. Tell it to buy and sell at certain levels, and they’ll do so without the need to think – and they’ll be able to do it thousands of times quicker than any human.
Of course, this was sad. I really felt like I was living the dream. And it was taken by actual robots – like out of a 1980s sci-fi novel.
I didn’t get mad like some, though. I watched the development of these robots in the markets. Saw what they could do. And then I gained an edge.
And I want to cover the most important lesson I learned with you today…
What These Bots Can Do
Since 1987, “Flash Crash” has been branded in nearly every person’s mind. And it’s that way because of these algorithms.
Think about it like this: If 75% of market activity, billions and billions of dollars, is through bots and we see a decline in a few different sectors that hit levels at which the bot is supposed to sell, it’ll trigger more and more bots to sell, sell, sell.
A small decline can be amplified into a large one. And fast.
What’s worse is that it isn’t just in U.S. stocks, either. Algorithms move across country lines, through different exchanges, playing with stocks, options, currencies, futures, and more. The interconnectedness creates global systemic risk.
And that was exemplified in 2008 when sub-prime paper wasn’t held by just U.S. institutions. The Great Recession was global largely because of algorithms.
Later on, once the bots developed even further, these flash crashes had the ability to become even more erratic.
And that’s exactly what happened in May 2010.
Over the course of just a few minutes, the Dow fell 1,000 points, and markets in all lost 5% to 6% of their value. And over 20,000 trades on 300 securities were executed as far as 60% away from what they should’ve cost.
Obviously, there can be a bad side to algorithms. Just imagine if we hadn’t come back – how many people would’ve lost money.
That’s a major risk as an individual investor if you have any skin in the game.
Volatility is good – like we talk about all the time.
But when it’s amplified beyond human means, well, losses can be unpredictable and devastating.
That brings me back to what we were speaking about just a minute ago. You see, I had a chance to witness these robots firsthand. I know what they’re capable of, I know how they operate, and I know how they make money.
And that’s what gives us the edge – which is why I’ve created a research presentation around it right here.
Speed doesn’t matter if you know the direction in which these bots are going. But that’s only if you use the trades you’ll learn about in this video.
I’ll be back with you next week,
December 10 2022
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