"share wars: how the robots are robbing you"

The prevalence of computer-generated trading in the modern sharemarket has created an unpredictable, and sometimes dangerous, environment for investors.

'The problem is that the computers queue-jump.'

Robots don't have to take over the world when they've got sharemarkets in their clutches already.

Unlike a mere mortal trading, there isn't even a broker between machine and, well, machine. All that stands between them is a fee the Australian Stock Exchange collects.

Self-automated algorithms can generate 150 trades in the blink of an eye and, unlike ordinary investors or even the big funds, have been given the ultimate privilege of plugging straight into the ASX's computer. They're the ultimate inside traders.

Since the one-minute massacre of QBE Insurance more than two years ago by a rogue robotic trading program, all that has changed is that now it would take a mere millisecond. And it wouldn't stop at one stock.

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The share price was savaged from $15.70 to less than a cent before anybody could do anything.

An even scarier incident recently on Wall Street, where price swings have become increasingly wilder, showed what the automated computer programs that drive most of its trading can do.

Knight Capital Group's computer went berserk, blowing $440 million in an hour and made a mockery of the prices of 150 stocks.

So entrenched has speed trading become on Wall Street and in most of Europe that, in this globalised world, Australia's regulators haven't so much gone along with it as only suddenly realised what's crept up on them.

In any case, the ASX is compromised because it let the computers into its data room in the first place, lured by the prospect of fees on tiny - but relentlessly frequent - trades.

SURVIVAL OF THE QUICKEST

Speed-trading computers sit next to an exchange's to minimise the millisecond it takes for data to go down a fibre cable. The whole point is they have to get in first.

The problem for punters who must use a broker, along with super funds and everybody else except the owners of the algorithms, is that the computers queue-jump.

They have an unnatural advantage in seeing an order before brokers do.

Think that's bad? Try this: ASX announcements and news wires such as Bloomberg are fed straight into the algorithms. They can read, digest and act on the information infinitely faster than you.

Bet you aren't sent a profit downgrade straight to your computer from the ASX the moment it's announced. Thought not.

But imagine the advantage a robo-trader would have in knowing before you.

That used to be called insider trading. Now it's ''liquidity enhancement'' and it's legit.

Read more: http://www.theage.com.au/money/share-wars-how-the-robots-are-robbing-you-20120825-24t4t.html