The Impact of Technology on the Stock Market
By: Kevin Johnston
High-tech trading can change the way stocks behave.
There was a time when boisterous traders at the New York Stock Exchange yelled out orders to each other, creating a raucous din. When a stock traded on the strength of a news story, traders gathered in the stock’s trading area and started shouting matches that sounded like brawls. Today’s high-tech trading goes on without the shouting, and offers investors efficient ways to research and purchase stocks.
According to the Securities and Exchange Commission, investors have unprecedented access to information about companies and their stocks. The Internet provides current stock prices, company earnings reports, and breaking news about stocks and the companies issuing those stocks. Financial advisers can relay current developments to their clients, and companies can track the performance of their stock in real time. The result of this nearly instantaneous information is better-informed investors, traders and advisers.
Execution of Trades
Computer systems record buy and sell orders so quickly that investors can know their price and other details within seconds. In addition, because electronic trading eliminates handling of transactions by people, errors have become infrequent. Though the long-established standard of three days remains in effect for verification that money has changed hands and the shares have been recorded in the buyer’s account, in practice, electronic trades accomplish all of that in seconds.
Electronic trading has encouraged the phenomenon of high-frequency trading. People using this trading style buy and sell stocks within the same day, sometimes executing a full buy-and-sell cycle within minutes. Though this gave rise to what is commonly called “day trading” for individuals, the true impact comes from institutional investors who initiate trades in millions of shares in a matter of moments. This can trigger a buying or selling frenzy among other investors who want to participate in what they see as a trend developing in a particular stock. This type of trading was unavailable when trading was much slower.
Program Trading and Glitches
Many institutional investors, such as mutual funds, hedge funds and pension funds, use programs to buy and sell stocks. This can result in a sudden sell-off or purchase of stocks, because the program has a specific date and time to make the trade. Investors can be fooled by the sudden volume. In addition, some institutional investors experience technology glitches that can trigger sudden buying and selling. These events can put traders in a panic, because they see no news to justify the trades, and assume that they should buy or sell the stock so they can be in on the action.
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