Some of the links below point to fairly technical discussions of automated trading systems on Wall Street. I’d recommend you read them, anyway. They’ll help you become a better investor in two ways: (1) by giving you a visceral understanding of the dark side of institutional investing on Wall Street, and (2) prove that most of what goes on in the market these days is, quite simply, noise.
High Frequency Trading is proprietary computer trading with the goal of collecting rebates, and/or detecting real order flow (i.e. institutional flow) and frontrunning it and making pennies.
And, yes, frontrunning is illegal, thus explaining why the blogosphere (or at least the geeky investing parts) are aflutter these days with questions about High Frequency Trading.
1 – A quick, simple intro to HFT. Source for the quote above.
2 – Toxic Equity Trading Order Flow On Wall Street. An excellent primer.
3 – Goldman Sachs Loses Grip On Its Doomsday Machine. The theft that launched a thousand blog posts.
4 – What’s The Frequency, SEC? The mainstream media starts asking questions.
5 – Automated Front Running On An Unfathomable Scale. That about sums it up.
Hat tip to ZeroHedge.
View of Statue of Liberty from the NYC harbor today. http://yfrog.com/5c3q5j 2 days ago
Just another reason that Goldman is the devil. Now, I am not an anti-capitalist, quite the contrary. I am a libertarian, free market proponent. But, this company that is hailed as the truest capitalists in the world and nothing more than a glamoured middle man. They are corporatists who are only alive due to government aid, which came through AIG. Plus, the government stepped in after Lehman and Bears died. Of course, Goldman had a huge short on those companies. Classy. And, now it is becoming apparent they are front-running institutional trades. Many of these institutions are their clients. What a way to treat clients.
I hope the blogosphere keeps on them and this practice. Much of this rally could be driven by this behavior. What happens when they decide to reverse course? To say this is noise is certainly an understatement.
Irony is that Wall Street doesn’t really want free markets – it wants markets that it controls. Folks in DC have always had a tough time telling the difference. And looks like the NYTimes is now weighing in on High Frequency Trading, too: http://tinyurl.com/mmhx8w
When half the volume is derived by this practice, it just guarantees more volatility. If the buyers are out, expect higher rises. Conversely, we will see bigger downward moves when companies miss estimates.
Ignore the short term or expect to go crazy.