(Last Updated On: November 20, 2019)

Welcome to a wild world of robot investing

The wild market gyrations are testimony to how computers now dominate the workings of the stock markets. Automated computer programs have changed how markets function. The US Securities and Exchange Commission estimates that these programs represent more than half of all US stock trades.

Automated computer orders are being executed at lightning speeds in huge volumes. Since their algorithms (programs) are often similar they tend to create a “herding” effect that can ripple across the system in a “computer stampede,” faster than the human mind can process.

The computer programs link numerous market segments together so when they cannot buy or sell assets in one segment of the market, they will rush into another, hunting for liquidity.

The stock market comprises both investors and traders. Investors use the stock market as a means of exchange, and seek to benefit from the long term growth in corporate profits being reflected in higher dividends and stock prices. Traders treat the market as a casino and seek to profit from short term movements in stock prices. Computer algorithms now dominate trader’s trading strategies.

Robot generated volatility creates opportunity for long term value investors to buy. However, small investors tend to suffer because they easily panic and sell.

These wild market gyrations are now a central feature of our robot-dominated markets. The good news is that while “computer stampedes” are violent, they tend to be short lived.

Remember also that while the markets may fluctuate, dividend income is not affected and rises over time.

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