By Irene Aldridge Recent arguments accuse high-frequency traders (HFTs) of a specific market distortion scheme. The HFTs, the argument goes, use their soon-to-be-cancelled limit orders to mislead large investors about the shape of the supply and demand curve. This HFT strategy is purported to work as follows: 1) an HFT posts lots of limit orders on both the bid and the ask sides of the trades; 2) once the large trader’s market order hits the bid (or lifts the offer), the HFT now knows that the large trader is now selling (or buying); 3) the HFT cancels all other limit orders and starts aggressively tradingRead More →

By Irene Aldridge Many articles on the subject of money talk about different ways to invest the money: which stocks to pick, whether to choose bonds over stocks and Exchange-Traded Funds (ETFs) versus mutual funds. Few of the pieces, however, address the key issue underlying any allocation which may be keeping investors up at night: the implicit costs of placing their money into someone else’s hands. Any investment decision amounts to just that: transferring money into someone else’s care. When purchasing stock of a particular company, an investor transfers his money to the management of the stock-issuing corporation with the sole hope that the managementRead More →

By Irene Aldridge Several decades back, managing investment risk was straightforward by today’s standards. A simple strategy of “don’t put all your eggs into the same basket” worked well: invest into many stocks with different businesses, the thinking went, and reap the rewards of positive returns in all market conditions. The key underlying premises of “multiple baskets” investing were two-fold: Stocks of companies in different industries rarely moved in tandem; and Most stocks were expected to rise in the long term. Today, neither of the two principles holds: Many companies and their stocks face an uncertain future, and lots of stocks sway together in responseRead More →

By Irene Aldridge Present economic conditions leave much to be desired: Europe is trying to resolve its debt problems, and the U.S. has seen much better times in terms of employment rates and consumer confidence. Against this backdrop of economic calamities, the financial markets are experiencing high volatility, seesawing up and down, gaining and losing in excess of 3% on a given day. Whether the current volatility is without a precedent, however, is up for a debate and depends on how volatility is measured. The most common way to assess volatility is via standard deviation, a square root of the average of squared deviations ofRead More →

By Irene Aldridge The latest turmoil observed in the European and U.S. markets may be symptomatic of a broader problem: changing behavior in financial securities. Historically, prices of unrelated securities used to rise and fall independently of each other and without great influence from the broader markets. Recent studies show that when markets rise, individual stocks still behave differently: some rise and some fall. Yet, when today’s markets fall, most stocks tend to fall in unison, amplifying negative performance of individual equities. The shifting risk-return characteristics of financial markets may influence the outcomes of investing styles, and change the way people look at markets forRead More →