The Herald Bulletin

Morning Update

Columns

April 13, 2013

'Big Joe' Clark: Trading just got faster

The days of watching the ticker tape at your broker’s office have long passed us as technology has improved and the use of the Internet has spread.

For those of you who don’t remember, there were days where there was no financial news. Trading stocks, commodities, currencies, etc. has come a long way. Costs have come down, execution times have shortened, and access to information has never been more at our fingertips.

The question is not only what information is useful but what is actually legal? Changes will come but there are things you should be aware of and certainly consider.

Last July, Reed Hastings, the CEO of Netflix, wrote on his personal Facebook page that his company had hit a record high in viewership. Typically, these types of announcements are made in press releases and posted to the respective company’s website, not the CEO’s social media page. The Securities and Exchange Commission (SEC) then informed Netflix it was being investigated for potential violations of Fair Disclosure laws. However, many were surprised when the SEC announced that it will allow companies to make announcements via social media.

This changes the game for investors. If an investor would like to stay up-to-date on a company’s happenings, he or she must now follow the company’s key employees on Facebook, Twitter, Instagram, and maybe MySpace just to be safe. While the exact reason of why shares of Netflix popped on the same day as Hasting’s status update cannot be fully disseminated, it’s reasonable to assume his announcement played a role.

Trading has gotten faster. Information is important but the speed has also created far less rigor in making sure what is stated and written is accurate. We know two emotions drive investors: fear and greed, with fear being the stronger of the two. More information leads to more emotion and more trading, which keeps Wall Street happy.

Another technology is high frequency trading, which uses extremely fast computers and algorithms to make hundreds if not thousands of trades each day. According to a study mentioned in a Barron’s piece in February of last year, 70% of all trades made on the exchanges were initiated by high frequency traders. Michael Hudson, a former Wall Street economist, stated that the average hold time for a stock was 22 seconds in 2011.

The debate over social media news releases and high frequency trading will continue for years to come.  What we all know for sure is things have changed and will continue to change. You must have a process in place to deal with and absorb the evolving world of investing.

I teach my students at Purdue to begin with the end in mind. Know what you are saving for. Know what you own and why you own it. There is a flood of information that can impact our investment decision. It’s our job to filter the noise and determine what’s important.

Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at bigjoe@yourlifeafterwork.com or 640-1524.

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