In the world of investing, similar to any other industry, there are many players. All of them fundamentally are looking to make money from what they see as errors by the other person. The errors can be lack of knowledge on one side or another, not tilting the odds in your favour, inside information, specialized information, old trading habits in an information age, speed, and many others. In the book Dark Pools – High Speed Traders, AI Bandits, and the Threat to the Global Financial System by Scott Patterson, Crown Publishing, NY, 2012, Mr. Patterson discusses the rise of high speed traders. The stock exchanges have existed for many years, but for many years it never changed because those who ran it, ensured they could use insider information to continually make money. While the theory was a fair and transparent matching a buy and a sell, there was a flaw – a person in the middle and the person would buy and sell for their person accounts and it was deemed okay. The market maker were providing a service and it was consider good what they were doing. As the internet came along, people saw alternatives or there should be alternatives. With most systems, the change started with the second tier companies because to make money, they had to see which loophole they could jump through and be technically legal. Eventually, given the amounts of money to be made, the first tier companies were doing the same thing, then the rules were changed to allow for it to happen. What changed was – the old system of stock prices quoted in 1/8 of a dollar or .125 was used, the the market makers had enough volumes and traded ahead on the 1/8s,  there was plenty of margin to be made. When the change was made to .01 or pennies, increasing volume became more important as the margins decreased. To increase volumes meant all firms had to run computer programs to have an ability to compete. If everyone has a great computer program, similar to race car driving, speed becomes a competitive advantage. Mr. Patterson discusses the major players and some of the strategies of them in order to make money.

Linking to dividend producing stocks, for most of the time, although dividend paying stocks are very valuable, the programs use them as a hedging tool because the volume of price changes per share is lower than growth stocks. Growth stocks need to have reasonable price changes or volatility, either up or down, in order to make money from them. The reason is the cost of the hedging of the risk to an option price. If you are a owner of shares and hold them for the long term, while collecting the dividends, whether you bought at 45 or 45.10 does not really matter. If you were a high speed trader, your perspective would be drastically different, then it matters at 45 or 45.01. Understand in any market where billions of dollars are made and lost, there is a role for many different types of players.

There are more questions than answers, till the next time – to raising questions.