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Corporate Media Spotlights Distortion of Market by High Frequency Trading

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Washington’s Blog
Friday, July 24, 2009

The corporate media – after ignoring the fact that high frequency trading skews the market – is now starting to spotlight it.

Bloomberg interviewed the former head of Nasdaq, who says that high frequency traders account for 73% of the volume on the stock market, and skews the market when it gets out of balance.

The New York Times hits the issue pretty strongly, writing:

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer [My Comment: Tyler Durden has shown that Goldman Sachs is by far the largest program trader in the market, twice as large as the next biggest. Tyler also publicized the issue of high frequency trading long before almost anyone else, so I am really just summarizing what he has previously said] …

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage”…

PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

Corporate Media Spotlights Distortion of Market by High Frequency Trading  290509banner

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there…

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss…

The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades…

While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee…

Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques [said] “we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else.”

This article was posted: Friday, July 24, 2009 at 3:15 am





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