Rule #1 Finance Blog

With Investor Phil Town

THE NYSE’S HYBRID ELECTRONIC TRADING SYSTEM

Here’s a great question from Scott in Kirkland, WA:

Hi Phil.

I just read everything you have written that I can get my hands on (book, blogs, etc.) in less than 10 days. That’s a bug deal for me since the last book I read took me almost a year to finish. I’m loving the learning curve and have suddenly "awakened" to everything around me that could be a potential investment, and am noticing things that have Meaning to me that I never gave a second thought to before. I made my first paper buy today and am excited to see how I do.

I saw something on the news yesterday and I was wondering what your thoughts were:

I hear that on Friday (06 Oct 2006) the NYSE is going to a hybrid electronic trading system, supposedly meaning that it will be able to handle larger volumes faster. Does this mean the institutional money will be able to move in and out faster, giving us less time to react to The Tools? If so, what does that mean for us newbie Rule #1 guys – should we use faster tools? Or should we use slower tools to shield us from wilder fluctuations?

Thanks for everything,
-Scott

My response:

Scott:

When the stock exchanges become hybrids, all that’s happening is that
exchanges of paper on the floor goes slowly away.  It will help the
flow of trades get executed, which is what they mean by "faster". 

The
big guys will put in trading orders through their computerized systems
to unload in, say, 30,000 separate trades to be executed on set
conditions regarding volume and price.  These guys pay millions for the
software to do that. 

What a computerized floor will do is help move
those orders through the system easier.  But if prices drops too
quickly, say, the trading software is going to slow down or speed up
trades depending on what the trader told the computer to do in that
situation.  So faster execution doesn’t necessarily translate into more
volitility.  Theoretically.  We’ll have to see. 

Right now, the Nasdaq
is fully computerized and it’s fine.  No issue.  This is not to say
there couldn’t be another Black Friday, but nothing about
computerization of the floor necessitates more peril.  So keep with the
same tool settings and if you are a beginner stick with the slower MAs.

Now go play.