In 1970, seven years before the introduction of the world's first personal computer, sociologist Alvin Toffler's prophetic essay," Future Shock", was published. In the first paragraph of his book Mr. Toffler writes:
"In the three short decades between now and the twenty-first century, millions of ordinary, psychologically normal people will face an abrupt collision with the future. Citizen's of the world's richest and most technologically advanced nations, many of them will find it increasingly painful to keep up with the incessant demand for change that characterizes our time. For them, the future will have arrived too soon."
The rate of technological, social and economic change has been dramatic, and has become pervasive in every area of our lives. People have become addicted to change, and now find themselves dependant on it, and the accessibility to the information this change has brought about. Toffler was concerned however, with people's ability to cope with this change, and if this change actually enhances their lives. But in a time of an ever widening "wealth gap", can anyone afford to resist change ...and as a result, find themselves an unwitting victim of a technology or an information gap?
I think not. Nowhere is this more evident than in the world of trading, where the gap between the technological haves, and have-nots, has created an ever widening economic moat. This is most apparent in Goldman's continued hegemony on Wall Street. With unemployment still above 10%, and home foreclosures and bankruptcies setting records, Goldman was able to generate $3 billion inprofits in Q3 2009, and is sitting on $167 billion in cash. Revenue from trading has grown 4X from a year ago, funded by the bailout money, the Democratic administration was so quick to loan to the very same banks that brought down the system.
At the forefront of Goldman's success, is their prop trading division, and their technological dominance in (HFT) high frequency algorithmic trading. It is estimated that over 70% of the NYSE volume today is program generated, a significant portion of which are HFTs. While there are over 100 firms engaged in HFT, Goldman has been estimated to to be responsible for about 20% of the volume.
Algorithmic techniques and the technology that powers them have greatly influenced and altered the way that financial instruments are traded. It is Goldman's commitment to technology that allows them to rest firmly on top of the Wall Street food chain. That being said, it is the ways in which we adapt, or fail to adapt, to change that define one's success. So can an individual trader like you or me beat Goldman, or even compete with Goldman and the quants, to make money trading ?
First you have to recognize what they're doing and then perhaps you can take a piece out of their trading pie, or join them for the ride. In Part Two, I'll discuss high frequency algorithmic trading and the increasing availability of algorithmic trading platforms for individual traders.
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Gary Phillips is a contributing columnist to www.TheSmallCapInvestor.com. Mr. Phillips is the Founder of GAP
Capital and is a 30-year veteran in trading equities, bonds,
commodities and currencies.
