60 minutes on high frequency trading

[Poindexter]

This is ridiculous. I have no interest or knowledge whatsoever of the stock market but how much is being stolen from stock market investors?

60 minute report

[PhantomOnTour]

Amazing piece, and quite scary.
Guy is starting his own stock exchange...wow, that's thinking big.

[thaskalos]

There are some really bright, really conscientious people in this world...and I wish them all the best. The crooks have had it their way for long enough.

[JustRalph]

Originally Posted by thaskalos

There are some really bright, really conscientious people in this world...and I wish them all the best. The crooks have had it their way for long enough.

2nd the motion. And that young guy is awesome!

[PaceAdvantage]

Here's the one question I need answered.

Is what these high frequency traders doing unethical (we've already heard it is legal), or are they exploiting a legitimate edge they have created for themselves via innovative thinking?

There has always been a speed disadvantage in the markets for some people. Some people have slow connections. Some people use slower computers. How is this so different? Just taking a speed advantage to the next level.

I sense something isn't quite right here, but I don't totally understand it, even after watching the 60 minutes piece.

If it's not illegal (and the author states that it is not), then aren't we simply punishing these guys for being smarter and faster than the rest?

[Poindexter]

Originally Posted by PaceAdvantage

Here's the one question I need answered.

Is what these high frequency traders doing unethical (we've already heard it is legal), or are they exploiting a legitimate edge they have created for themselves via innovative thinking?

There has always been a speed disadvantage in the markets for some people. Some people have slow connections. Some people use slower computers. How is this so different? Just taking a speed advantage to the next level.

I sense something isn't quite right here, but I don't totally understand it, even after watching the 60 minutes piece.

If it's not illegal (and the author states that it is not), then aren't we simply punishing these guys for being smarter and faster than the rest?

Like I said, I know nothing about the stock market. My understanding from the report is that somehow their faster internet connections are able to peak into the orders of everyone else, beat them to the move and then resell to the person placing the order. So if I want to buy 10,000 shares of xyz, at $40 a share, their algorithm will see my order buy the 10,000 shares before me and then resell it to me at a higher price. I assume that they sell some back at $40 a share to avoid suspicion and then sell more back at the next price point whatever that may be. This all takes place in fraction of a second. It sounds like they are doing this all day long basically just stealing money out of the market. The report indicates to the tune of 10s of billions of dollars. Why it is legal, is beyond any comprehension.

I don't get it. If a group of thugs break into a walmart and empty it out..what animals. These guys steal billions and it is a minor story.

Anyhow that was my interpretation of the report.

[thaskalos]

Originally Posted by PaceAdvantage

Here's the one question I need answered.

Is what these high frequency traders doing unethical (we've already heard it is legal), or are they exploiting a legitimate edge they have created for themselves via innovative thinking?

There has always been a speed disadvantage in the markets for some people. Some people have slow connections. Some people use slower computers. How is this so different? Just taking a speed advantage to the next level.

I sense something isn't quite right here, but I don't totally understand it, even after watching the 60 minutes piece.

If it's not illegal (and the author states that it is not), then aren't we simply punishing these guys for being smarter and faster than the rest?

It's a scam...whether it's considered "legal" or not. The exchanges invested $300,000,000 in order to secure a "speed advantage" and be able to read the minds of their customers...and then they LEASED this speed advantage to the high-frequency traders -- at $10,000,000 a pop. The high-frequency traders were then able to identify the intentions of the other investors...and would secure the shares that these investors wanted to buy, BEFORE they could buy them...and the traders would then proceed to sell those shares back to the investors -- at a higher price...and with no risk whatsoever.

If the high-frequency traders had been able to do all this by themselves...then you could argue that they were just being "smarter and faster" than the rest. But with the exchanges initiating this, and then bringing in the high-frequency traders after the fact...this becomes collusion with the intent to defraud -- which should be illegal...no matter WHAT the "law" says.

The "law" can be inconsistent at times...you know.

For instance:

Insider trading is considered to be illegal for all...but the politicians.

[lamboguy]

OF COURSE ITS A SCAM



any type of gambling is about getting value for your money. equity markets are no different. when you have information that someone else doesn't have you have an edge. to relate that to horse racing, we all know who the jockey that rides the horse in the afternoon by reading the program. but knowing who the exercise rider is means about 100 times more. the majority of the public doesn't know.

anyone that has information before it becomes public knowledge in equity markets have a huge edge.

i have always been shocked how some very smart people think they can win trading these markets. i have watched the very brightest people get cleaned out trading these markets.

[barn32]

Maybe this is what Billy Walters was talking about.

[Robert Goren]

Old news. We even had threads on them starting at least far back as 2009. It was big news when there was a "flash drop" in a few stocks a couple years that was I believe was incorrectly blamed on them. CNBC has had several pieces on them.

[incoming]

Like Robert said old news, if you are a retail investor I wouldn't loss any sleep over this news. A much bigger problem exist with the dealing desk at your broker.

[fast4522]

Nothing to do with the people your talking about but . . . . . .

Billionaire Warns: The Next Bust 'Will Be Unlike Any Other'

http://www.moneynews.com/MKTNews/eco...edium=referral

[badcompany]

Originally Posted by Robert Goren

Old news. We even had threads on them starting at least far back as 2009. It was big news when there was a "flash drop" in a few stocks a couple years that was I believe was incorrectly blamed on them. CNBC has had several pieces on them.

It's old news in that it goes back more than 100 years.

The way the game is set up is that, at the center, you have Market Makers, which essentially are the big banks. These Market Makers are akin to used stock dealers.

What does a dealer do? He maintains an inventory of goods for sale. Now, if he buys these goods for more than he sells them, he's not gonna stay in business for very long, is he?

In the past, you had a Specialist who could see the orders coming in and would act accordingly. Now, it's done via algos which spot discrepancies between supply and demand and act accordingly viz. maximize profits for Market Makers.

[Clocker]

Originally Posted by PaceAdvantage

Is what these high frequency traders doing unethical (we've already heard it is legal), or are they exploiting a legitimate edge they have created for themselves via innovative thinking?

As I understand it, it is not unethical. The HFT is using information that is available to the public, but he is able to access it sooner because he has a better information gathering system. He (i.e., his computer) sees the order, knows that demand is going up, buys the stock (which also minutely increases demand, and therefore price), and sells the stock to the buyer before anyone else can. The HFT has no monopoly on the stock, nor on the access to the buyer. He just acts faster. The HFT is engaging in arbitrage, buying in one market and selling in another. The two markets are the market for the stock right now, and the market for the stock a fraction of a second from now. The HFT's actions help create the difference between the two markets.

[lansdale]

The damage done to the economy by high-frequency trading has been a subject of discussion for at least the last few years, by figures as diverse as Paul Wilmott and Paul Krugman.

Krugman dealt with the issue in a 2009 column:

'But speculation based on information not available to the public at large is a very different matter. As the U.C.L.A. economist Jack Hirshleifer showed back in 1971, such speculation often combines “private profitability” with “social uselessness.”

It’s hard to imagine a better illustration than high-frequency trading. The stock market is supposed to allocate capital to its most productive uses, for example by helping companies with good ideas raise money. But it’s hard to see how traders who place their orders one-thirtieth of a second faster than anyone else do anything to improve that social function.'

'And there’s a good case that such activities are actually harmful. For example, high-frequency trading probably degrades the stock market’s function, because it’s a kind of tax on investors who lack access to those superfast computers — which means that the money Goldman spends on those computers has a negative effect on national wealth. As the great Stanford economist Kenneth Arrow put it in 1973, speculation based on private information imposes a “double social loss”: it uses up resources and undermines markets.'


http://www.nytimes.com/2009/08/03/op...gman.html?_r=1


For those unfamiliar with Michael Lewis, the author who is quoted in the '60 Minutes' piece, and whose forthcoming 'Flash Boys' is the likely motive for its existence, he also wrote 'Moneyball', about the influence of the new metastats on baseball, and 'Liar's Poker', about his experience working for Salomon Brothers in the '80s. This book will be widely read, and hopefully be responsible for a large number of people pulling their money out of the market.

BTW, if Paul Krugman and Just Ralph agree about this, does that mean End of Days is near?

lansdale