The impact of the high frequency trading and advanced technological algorithms has been changing the face of Wall Street at an increasingly rapid pace. Yet, as last week’s glitch at Knight Capital Group (KCG) showed, the heavy reliance on automated trading has made the financial system as a whole quite fragile. Risk is no longer limited to just a matter of strategy, and investors, and especially traders, need to understand that.
We asked Toni Turner of TrendStar Trading Group for her thoughts on last week’s $440 million trading disaster, as well as other developments in the market.
EQ: Last week, Knight Capital suffered major trading losses due to a glitch in its system. What were your thoughts on the debacle? As a trader, does the reliance on automated trading worry you?
Turner: Well, I believe that risk is inherent in our lives all day, everyday—from crossing the street to getting on an airplane. Those of us who are active in the financial markets should know that there’s risk involved. With that said, I think first of all, we need to skip the blame game, and go right to the heart of the problem. I believe that the very unfortunate Knight event—the third major such event in the last five months—should lead us to questions such as, ‘Is speed worth it?’
The increased reliance on automated trading and complex algorithms heightens risk of computer glitches, and in this case, it was a rogue computer algorithm that caused the slowing of buy and sell orders in about 150 stocks. We’re talking about one-one thousandths of a second. Is this speed actually heightening risk of these kinds of mistakes and events, especially as these programs become more complicated and faster? Knight Capital Group was a stable firm until this very few minutes of time took it to its knees. So if speed is heightening risk to that point, should we back off and look at it with a different set of eyes?
EQ: Were you surprised by the lack of new actions announced by both the Fed and ECB last week?
Turner: Yes and no. I think many times, these events are built up, and the anticipation is usually greater than the realization. ECB President Mario Draghi pledged further support with immediate action for the euro. It’s adding pressure to Spain and Italy to request assistance from Europe’s rescue fund, and would force them have to make deeper cuts in their national budgets and accelerate their economic reforms, which of course, they don’t want to do. Who can blame them? But they’re caught between a rock and a hard spot. I really believe this saga is going to continue for some time. We humans are very good at taking denial to the outside of the envelope. We see that kind of thinking expressed right now, in economies around the globe .
EQ: The market rallied on Friday’s jobs report, which was better than expected. However, the unemployment rate actually climbed for July. What did you make of this run?
Turner: I think the market really wants to go up, and I think that the term “better than expected” is our rally cry right now, and has been for the last three years. We’ll take anything we can get, so even though the unemployment rate climbed to 8.3 percent, the fact that we had more jobs on payroll than expected gave bulls a reason. Plus, it was Friday, and the simple truth is, the market likes to go up on Fridays. The proof will be in what happens this week. We’ll see if this momentum can continue, but we should also enjoy it while it’s happening, as I would not be surprised to see a pullback, or some profit-taking in the next few days.
EQ: Which particular groups are you watching for the week?
Turner: In Toni’s Market Club right now, we’re watching the Market Vectors Coal ETF (KOL) and Market Vectors Steel ETF (SLX), in a bottom-fishing strategy. These names are showing signs of interest and volume coming into them. If, in fact, Europe can keep kicking the can down the road, and China continues to work on getting their economy jump-started again, these kinds of basic materials groups may get a little pop because they’ve been beaten down so hard. I would play them conservatively, though, with small share size and firm stops. If we run into a pullback soon, these names may surrender price gains along with the broader market.