The algorithmic, high frequency traders, hedge funds… How they profit! What few analysts & investors understand.

QUESTION …HOW IS THE HIGH FREQUENCY/ALGORITHMIC TRADING DONE?
To better understand it, we know a wealthy investor in Florida, a Mr. Smith who does “high frequency type trades” exclusively for himself! We estimate that he has over $100 million in investments. We are trying to simplify this with a small example but understand that each day we are seeing the major traders doing hundreds of millions of dollars in high frequency trading and algorithmic trading.

QUESTION…HOW MUCH DOES THIS INDIVIDUAL INVEST IN HIS TRADES?
He will generally risk $50,000 to $200,000 in each trade and at times even more. BUT KEEP IN MIND THAT DURING A NORMAL DAY OF TRADING HUNDREDS OF MILLIONS OF SHARES ARE TRADED IN THE HIGH FREQUENCY AND ALGORYTHMIC TRADING PROGRAMS. MAKING A PROFIT OF .10 CENTS ON A VOLUME OF 100 MILLION SHARES WOULD PROVIDE A RETURN OF $100,000.

QUESTION …WHAT STOCK SECTORS DOES HE INVEST IN FOR HIS OWN “HIGH FREQUENCY TRADING”?
All stock sectors but generally only in stocks that have high volume and offer sufficient liquidity.

QUESTION … WHAT IS HIS “METHOD” AND “GAME PLAN” (WHAT DOES HE REALLY DO IN A TRADE?) THE FUNDS (ALGORITHMIC, HIGH FREQUENCY, HEDGE FUNDS) DO THE SAME EXACT THING BUT ON A MUCH LARGER SCALE.
A SIMPLE EXAMPLE…
We are using this small example for simplicity. In fact the high frequency trading, algorithmic trading and hedge fund trading are often 90% or more of the total. Today the private individual retail investor is approximately a mere 3% to 4% of the total volume-if even that.

STEP ONE Let’s say that Mr. Smith invests in 10000 shares of XYZ stock that is selling at $20 per share. He has already done his analysis and specifically the technical analysis (charts) project at least a small move up in price. Catching at least that small move is what he is aiming for.

STEP TWO…Mr. Smith will target a sell price that he will sell his 10000 shares at…it is done by computer by institutional investors or he can monitor it and choose the sale price in himself.

STEP THREE….Mr. Smith sells his 10000 shares at $20.25 per share….Smith thus makes .25 cents per share on 10000 shares so he quickly earns $2500 on one quick transaction. He can be in and out with his trades all day long. On a bigger scale, institutions and the high frequency traders, algorithmic traders, hedge funds and others are doing this in many millions of shares in minutes throughout the day.

Thus the professional traders take a huge share of the overall volume and as easy as it may seem, they do lose often as well. By the way, they add further risk to the stability of the stock market as they are able to short and continue to short with the “special benefit” of no upticks being required before shorting stocks.

The uptick requirement was removed fifteen years ago to increase the profitability of the banks and brokerages at the expense of the investing public and the stocks that trade. Make no mistake about that. The uptick requirement for decades protected the market and stocks from manipulation by traders who’s focus has always been their own profits. The investing public has been last in line.

The above “Mr. Smith” is an example on a small scale of the trading dominated investing done today by algorythmic traders, high frequency traders and hedge funds that have an enormous influence on market direction and valuations. These types of trades are done daily with hundreds of millions in volume.

And with no upticks being required, once a stock is trending down they can continue to short that stock(s) relentlessly thus adding to an image of more weakness for the stock(s). It is not the true shareholders who are selling their own shares but the trading desks. The damage being done by this will manifest itself once a severe bear market commences.