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The Market is Rigged
High Frequency Chicanery
By MIKE WHITNEY
Here's something to munch on from Dennis K. Berman in last week's Wall Street Journal:
"Today, small investors are fleeing the equities markets in droves, according to data from the Investment Company Institute, pulling out a net $34 billion from stock funds so far this year.....They say, "I still feel like someone is screwing me......trading feels different than it used to."
Berman traces the problem to its source, the "inscrutable interplay between myriad exchanges and high-frequency traders, whose volume now accounts for an estimated two-thirds of all trading"..."a market that many perceive as tainted and prone to gaming by a cadre of insiders."
That sounds like a long-winded way of saying the market is rigged.
High-frequency trading (HFT) is algorithmic-computer trading that finds "statistical patterns and pricing anomalies" by scanning the various stock exchanges. It's high-speed robo-trading that oftentimes executes orders without human intervention. HFT allows one group of investors to see the data on other people's orders ahead of time and use their supercomputers to buy in front of them. It's called frontloading, and it goes on every day right under the SEC's nose.
In an interview on CNBC, market analyst Joe Saluzzi was asked if the big HFT players were able to see other investors orders (and execute trades) before them. Saluzzi said, "Yes. The answer is absolutely yes. The exchanges supply you with the data, giving you the flash order, and if your fixed connection goes into their lines first, you are disadvantaging the retail and institutional investor."
Frontloading is cheating pure and simple, but rather than go after the "big fish" who run these enormous computerized skimming operations; regulators have been rolling up rogue traders who abscond with the trading code.
Here's a blurp from wired.com:
"Monday’s arrest of Samarth Agrawal, 26, came nine months after a Goldman Sachs programmer was arrested on similar charges that he, too, stole his employers source code for software, his employer used to make sophisticated, high-speed, high-volume stock and commodities trades.
“The Securities and Exchange Commission is investigating the use of these programs that many believe give their users an unfair advantage over other traders. Nevertheless, stealing the code to these suspect programs remains illegal. ("Second banker accused of stealing high frequency trading code", wired.com)
Right; so stealing from stock cheats who are gaming the system is against the law? Roger.
Today's market is configured in a way that the only reliable way to make money is by increasing volume and trading on myriad venues. We're talking about gains of mere pennies per trade on zillions of trades. The problem is that--when there's a glitch in the system--the high frequency bullyboys head for the exits taking an ocean of liquidity with them. That leads to a "flash crash" like the one on May 6 when the markets tumbled nearly 1,000 points in a matter of minutes. And, there's nothing to prevent a similar cataclysm from taking place in the future, because nothing's changed. The SEC still has its head in the sand.
There appears to be general agreement about the nature of the problem. (Though see Pam Martens’ The May 6 Stock Crash Revisited and The Big Plunge on this site, AC/JSC) Here's Berman again:
"When BlackRock Inc. surveyed 380 financial advisers earlier this summer about the flash crash, their perceptions said it all: The mayhem had been primarily caused by an "overreliance on computer systems and some types of high frequency trading" strategies that roam the market en masse, looking to pick off pennies of profit." ("A Market Solution That Put Investors in a Fix", Dennis K. Berman, Wall Street Journal)
No one wants to fix the problem, because then the big players would lose boatloads of money, and that just won't do. So the vehicle continues to speed faster and faster down the mountain veering wildly from one side of the road to the other. How long before it jumps the guardrail and plunges to the bottom of the canyon? Stay tuned....
Capital Hill is awash in Wall Street's dirty money, which means that congress will block any law that threatens the main profit-centers of the big banks or brokerage houses. HFT, complex derivatives, securitization and repo transactions will all be preserved in their present state until the next big tremor rumbles through lower Manhattan bringing the markets down in a thunderous roar. Make sure the cuboards are full.
Mike Whitney lives in Washington state and can be reached at firstname.lastname@example.org