“I am enjoying Crowd Money enormously. Just can't wait to get it finished.

“As I have been listening to the audios daily since before the word "podcast" was first coined it is all familiar ground, but it is SO nice to get all this information nicely organised and systematically presented.  I feel it will make a definite difference to my tactics and therefore hopefully to the profitability of my investing.  It has already made me more disciplined - I rushed in to put in the stops I hadn't taken seriously enough.

“One question for you and David to ponder.  Your approach is based on trying to understand the psychology of investors, who are humans after all. Or are they? Nowadays more than half of all trades are made by computer programs.  How does this affect the macro behavioural approach? The trouble is that nobody know what's in these programs - nor will we ever know.  We only hear about them when they cause chaos by going wrong.  But clearly we have to take them into account in our trading technique”

And

“Another point occurred to me while reading your excellent book.

“All your and David's descriptions of the trading process go something like this. One finds an appropriate time to enter the market, presumably at the market price. One then places stops. Some time later one chooses the correct tme to exit the market, again presumably at the market price, if one's stops have not been hit.

“In all of this the awareness of supply and demand is vital. These are presumably manifested as bids below the market and offers above the market.  Yet it is never suggested or described by you or David how placing bids or offers away from the market can be used as a tactic. 

“Since I have been taught by you and Daivd, my practice is also basically to buy and sell at market price, except that I look what's happening intraday and make a bid or offer to make the best of the short-term ranging.  But I feel I am missing out on an important technique by never placing long-term bids or offers. Whenever I have tried to do so it has gone badly, either by a market running away from me, or by a market reaching my bid/offer and then continuing in the same direction.

“Some guidance on this factor would be much appreciated.  When is it appropriate to do so?  And how far should the bids/offers lie from the market in different situations?"

Eoin Treacy's view

Thank you for your kind words and I'm delighted you are enjoying Crowd Money. I wonder if you have reached the section on governance where I discuss the advent of high frequency trading and the vacuum of regulation in which it exists?

High frequency trading is an amorphous term used to describe a wide range of computerised trading strategies each with a profit motivation but with different ways of accomplishing that goal. In many respects this is just like the wider market but at a much faster pace. If we ask the simple question of whether trends are still evident in the market following the growth of HFT, we get an affirmative answer. Therefore we can conclude that while the speed of trading has increased, the same interaction of supply and demand is taking place and this can be interpreted using the emotional cues that drive any market, regardless of whether a human is inputting the trades. The fact that we occasionally see flash crashes is further evidence that computers panic in and panic out just like humans.

While HFT is comparatively new, some of the loopholes it benefits from are as old as any market. Front running and spoofing have been around for a very long time and while the practice has been curtailed by regulation for regular investors, HFT has so far escaped that form of oversight. This represents a glaring example of preferential treatment that runs contrary to the facade of equal opportunity on which confidence is built.

HFT has necessitated that we take a careful look at exactly what we wish to achieve by placing stops and other orders because computers try so hard to trigger them. If we are active in a market where we know HFT proliferates then it is important to answer the question “what would need to happen to change the consistency of the trend?” This is the precursor to introducing a stop. Whether you then decide to place the stop in the market, set up an alert via your broker or monitor the level is your decision but in any event you will still have a point of emphasis that will necessitate a decision.

It is a fact that flash crashes have become more frequent since 2010. The abundance of central bank stimulus and the growth of HFT have probably both contributed to this state of affairs. If we seek to profit from these occasional bouts of turmoil if must be in the knowledge that they have so far occurred in what has been a medium-term bullish environment. At some point, the market will top out and will enter a medium-term bearish phase. In that case orders below the market may still prove fruitful, but will be at greater risk of resulting in an unfavourable entry point. In either eventuality, maintaining an awareness of the macro environment, monitoring the consistency of trends and evaluating your strategy from a dispassionate perspective will remain essential

This topical article from Bloomberg on HFT may also be of interest.