Technology has come a long way since I started in the brokerage business back in 1987. In those days we got our stocks quotes from what were then called Quotron machines. This was state of the art technology at the time and was very expensive to maintain. Only the big “wire” houses, or brokerage firms could afford them at the time. The average retail investors had to rely on the brokers behind these Quotron machines for their order placement and getting live quotes from the various exchanges. The commissions charged per transaction were quite high then, which helped subsidize the high cost of the technology.
Technology has made significant strides since then, and as a result transaction fees have come way down and information is being disseminated at lightning speeds. In addition, technology has somewhat leveled the playing field for the retail trader and investor in that it gives them the ability to place advanced orders and receive live quotes fairly inexpensively.
With all the advances in technology you would think that the retail trader could compete with the institutions. The fact is that the disparity between the profits of Wall St. and that of the average retail trader and investor is bigger than ever.
Many novice traders fall under the misguided impression that they need to have the best technology to produce consistent results. For example, they think that having 4 or more monitors and the best computer will in some way enhance their results. Might it help in a small measure, perhaps, but as many find out, the essential equipment is all that’s necessary, anything more becomes superfluous.
Please don’t misunderstand want I’m trying to convey here. I’m a huge believer in the technological revolution. I subscribe to the idea that technology indeed enriches our lives. In trading, the best innovation that’s come about over the last 15 years is the ability of professional level platforms to enable traders to place OCO (order cancels order) and OSO (order sends order) types of orders directly to the different stock and futures exchanges. In the past, (because of the limitations of the market makers handling order flow) if a trader wanted to enter the market using a buy limit order he was constrained to placing a single order. He was unable to place a sell stop or sell limit to capture profits until the primary limit order was filled. This put the trader in a precarious situation because if he was not present when his order was filled, he would be unprotected against big losses due to the fact that he didn’t have a stop in place.
With the new technology that’s a thing of the past. The algorithms in many of the professional level platforms allow traders to place all three orders simultaneously. This can be done because when the primary order fills, the other two are sent to the market. The other two orders are now set to cancel when the remaining order is filled. In other words, when a trader is filled on the buy limit, the sell stop and sell limit orders are sent to the market. At this point one of these two orders will fill, cancelling the one that’s still working. Simply, this does allows a trader to be more mechanical and disciplined in their approach.
This feature of the new platforms can indeed help a trader, but only if a trader has the discipline to leave those orders alone. And therein lies the challenge. So no matter how great the technology, it’s the strategy, the patience and discipline that will make a great trader. Technology will play a small part, but that’s about it; similar to a golfer who buys the most expensive set of golf clubs with the hopes that these will make him a better golfer. We all know that’s wishful thinking, and that doesn’t belong in a successful trader’s mindset.
Until next time, I hope everyone has a great week.