Trivago and Traders

I was high-frequency traded by a travel site.

Had that happen? You web-search a place and pricing and there’s no availability for the date you want so you check elsewhere and suddenly there’s vacancy – but now it costs more so you better act fast!  It’s like the stock market’s recent performance.

It’s not the first time I’ve been played by algorithms but it happened trying to book rooms in Crested Butte this week as we toured my visiting mother around the continental divide. Having spoken with hotel staff and knowing there wasn’t peak demand, I waited. At the hotel we got the best bargain of all. If you want a good deal, cut out the middle man.

And when you’re shopping online for a hotel deal, realize it’s a cabal. Expedia owns hotwire, hotels.com, Orbitz, Travelocity, and trivago to name the biggest brands. Priceline owns booking.com and Kayak among others.

When you start searching for a travel deal, the machines know almost instantly. It’s an integrated network where much of the pricing and supply are controlled by a handful of players.  Start looking for rooms, and rates rise not due to supply outstripping demand but because middle men change the prices.

Let’s think about the stock market. Expedia and Priceline have an advantage through being many places simultaneously. They’re in effect trading all the stocks – all the places you go unless you cut them out and go straight to the hotel.

Who in the market trades everything?  No, not Goldman Sachs. None of the big brokers trade anywhere near all the securities in the market. That’s not the business they’re in.

But high-frequency traders do. All our clients down to the very smallest ones under $50m in market cap are traded daily by high-frequency firms.

High-speed firms trade thousands of securities everywhere simultaneously, generally exchange-traded products where setting the prices everyone sees is the aim: stocks, commodities, derivatives and currencies.

But these firms don’t want to own anything. Wrap your head around this idea, because it’s a lot like getting travel-deal HFT’d.  The travel sites keep changing prices in order to prompt a reaction.  You’ll get teased: “Four left at this price!”

It’s the same in the stock market.  High-speed traders with vastly powerful networked machines connected to all the trading venues know every time there are ripples of supply or demand in any security.  Instantly, the price for that stock changes. If you’ve read the book Flash Boys, you get what I’m saying.

But let’s go one step further.  In the last 17 weeks through July 29 this year, there was not a single one in which Active Investors – buy-and-hold stock pickers – led as price-setters (through both the Brexit Swoon and Brexit Bounce).  In nine of those weeks Fast Traders did.  That’s over half the time (otherwise it’s been Asset Allocation – indexes and ETFs – or Risk Management, counterparties to derivatives like options and futures).

This is why the market is defying fundamentals. It’s exactly how pricing and supply defied fundamentals when we were trying to book a hotel in Crested Butte. Elevation Hotel & Spa was not remotely out. But the fast-trading hotel algorithms sure wanted everyone to think so.

The same thing happens repeatedly through each trading day. Stocks soar, and then falter and fall…and someone tries to book some shares…and all of the sudden prices race back up and the Dow Jones rises 80 points.  Better act fast!  These prices won’t last!

The truth is that the equivalent of booking.com is making it impossible for anyone to know the real supply and demand of stocks.  Since investors can only guess the same as we do hunting for hotel deals, they scratch their heads and try to buy.

You might say, “But we get good hotel deals.” As in the stock market, electronic trading ended laziness at big brokers and exchanges. But now the middle men have taken over. They’re now worse than what we had before. They’re fostering dangerous illusions.

Illusions cause markets to become mispriced because it’s impossible to separate the middle men from the actual supply of product.  How to solve it? First, understand how much of your daily volume is being driven by middle men. Then you can begin to measure what’s real.

Ultimately, investors and public companies should confederate to create a market that bars high-speed traders. Until then don’t be fooled by either HFT or booking.com.