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If you thought the Dow Jones Industrial Average gapping down at open last Thursday, then dropping a heart-stopping 785 points, and then rallying back 709 points to close down only 79.40 points was normal, you might be right.
As abnormal as that sounds, it's not unusual for equity markets to make intraday moves like that.
And while it's not unusual, the truth about how it happens is frightening.
Here's what's happening regularly in the markets, why it's so frightening, and how it affects you…
It's the "Bots"
The Dow's swing on Thursday totaled 1,494 points. In percentage terms, that's almost a 6% move.
That's not investors deciding at open to sell, sell, sell, then calming down and deciding at the end of the day to buy, buy, buy.
Investors don't invest that way.
In fact, traders don't even trade that way.
What that is, for the most part, is high-frequency trading (HFT) triggered selling on top of investor selling at the open. That petered out around 11:30 a.m. EST. Then HFT-triggered buying, which lasted until 2:00 p.m., followed – and was then followed by investors and traders selling until 2:45 p.m. Finally, another burst of HFT-triggered buying got investors to buy and short-selling traders to buy to cover their wrong-way bets, all the way into the close.
For sure, there are investors and traders at work all day. But the big turns – and a lot of follow-on momentum selling and buying – are caused by HFT gaming.
Investors were fearful at open Thursday. News that Meng Wanzhou – Huawei Technology's CFO and the daughter of Huawei's founder – was arrested in Canada on behalf of U.S. authorities put hopes that the United States and China might come to terms over tariff tiffs into a tailspin.
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Sell orders flooded exchanges before the open. Stocks gapped lower and sank in early trading.
Besides initial investor selling and traders shorting stocks, HFT algorithms automatically see there are sell orders coming down the wires to be executed – and jump ahead of those sell orders.
Because they can.
Their servers read incoming orders, and they can jump ahead of them because of their speedy access to exchanges' servers.
That means when investors' and traders' sell orders reach exchanges for execution, they often must take a lower price. A lot of those orders are market orders that knock prices lower, which scares investors more, which causes more selling, which HFT "bots" run in front of again, causing downward momentum.
That's what happened Thursday – and it happens a lot.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains.Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.