Q. What is high frequency trading?
A. Five years ago, if you asked me to name two arcane financial subjects that I’d probably never hear discussed in a diner in the Keys, I’d have said ‘credit default swaps’ and ‘trading algorithms.’ During lunch at Mangrove Mike’s in Islamorada a year ago, however, I first overheard someone mention swaps. If that shocking 1,000 point drop in the Dow Jones last Thursday was any indication, you may soon become familiar with the term “high frequency trading,” too.
High frequency trading or HFT is many things – including another example of how Wall Street is more interested in being a casino than a steward of wealth. Simply put, HFT is stock trading done by blazing fast computers at Wall Street firms – some of which are located literally right next to the computers that drive the NYSE and NASDAQ. The powerful algorithms on these HFT machines can create and change orders for stock in milliseconds. It is believed that a handful of HFT firms now account for half of all trading volume on the nation’s stock exchanges.
The problem is that through loopholes in the rules, high-speed traders get an early glance at how others in the market are trading. Seems odd, no? After all, if you learn a big secret about a company, trade on that secret, and then make money a month later, it’s considered insider trading and you’d go to jail. When HFT firms get to peek at the buys and sells of others in the market and then make their own trades split seconds later, however, it’s condoned and encouraged by the major stock exchanges. Not only that, HFT machines routinely take advantage of slower traders…or, in other words, us.
Why the loopholes? The exchanges say to “create liquidity,” or to ensure that large investors can buy or sell positions quickly. As you might have guessed, though, the exchanges also earn fees for allowing sneak peeks.
Did a HFT glitch cause the historic crash of last week? Officially, it remains to be seen. Candidly, though, I’ve got a hunch.
Spoke Funds® don’t cause 1,000 point drops in the Dow.
Kansas Mutual Fund is Linked to Market’s Plunge.
Ah, mutual funds. If only you used your powers for good instead of evil…
And the first annual Spoke Fund® workshop begins here in Islamorada in less than 12 hours. Notes to be posted soon!
It’s official. Four big Wall Street banks pitched perfect games last quarter.
The trading departments of Bank of America, Goldman Sachs, JPMorgan Chase and Citigroup each finished the first quarter of this year having made money every single day. According to their SEC filings, their traders did not lose a single penny on a single day the whole quarter. For 61 days in a row. All four of them. Really.
Now I haven’t determined the actual probability of that occurring in a truly free market, but I’m going to guess that it’s indistinguishable from 0.0000. That is, there is zero chance these guys are really that good. (See TARP, 2008.)
But when you’re acting like some kind of emerging market oligopoly, screwing over your own clients and letting computers trade for you, apparently it is just that easy. And as I’ve said before, investors beware. These big banks are lousy businesses. They have no sustainable moats. After all, it wasn’t one bank but four of them that just threw perfect games.
There’s more in this article from the NY Times – although it inexplicably fails to raise the question, “How exactly did this occur?”
This gentleman’s quote pretty much summed it up:
“This is just, as we call it, milking the market and your captive client base.”
Exactly, dear sir. This has nothing to do with talent or being a steward of wealth.
Unbelievable, isn’t it?
@PhilipEtienne No, will watch for a bit. Here's to hoping for another overblown scare in a few weeks, though. in reply to PhilipEtienne 5 hrs ago
