Let me make this perfectly simple...
High-frequency trading is a scam. It should be outlawed.
Regulators, namely the pimps and panderers at the Securities and Exchange Commission, and the exchanges, all of them, are in on the game.
The game, known as HFT, isn't arbitrage, isn't fair, isn't consistent with the keeping of "fair and orderly markets," and so should be illegal.
In case you don't know, here are the rules of the game...
- Pay the exchanges to "co-locate" your servers next to their servers, at the locations where they house them (and rent space to you for that explicit purpose).
- Get access to quote information (what stocks are being "bid" for at what price and for how many shares, and what is the "ask" price and number of shares that sellers are trying to unload), and be able to place your own bid and ask quotes as fast as technologically possible.
- Get yourself a bunch of money to trade with. You'll need millions, so maybe form a partnership to raise money or partner with some banks that don't already have their own HFT desks, you know, the ones that want to hide what they do.
- Get yourself a few nuclear physicists, rocket scientists, and computer wizards to write algorithms that can read quotes on both sides of every stock to determine patterns, the depth of markets, and how many shares you can buy or sell and then sell or buy in a matter of less than one-hundredth or one-thousandth of a second.
- Get your computers to fire off fake bid and ask quotes all the time to see how that changes others' quotes, in anticipation that they might show how bad they want to buy or sell, and when you get to a place where you can fire trades to buy and sell, almost simultaneously, buy and sell or sell and buy however many shares you can to lock in a profit, no matter how small.
- Get busier and busier doing this more and more, because you're only working for a tiny profit on every trade, so do it to trade at least 3.5 billion shares a day, which is half of all the shares that the nation's 13 exchanges trade daily.
- Get faster computers and bandwidth and execution speed. If you reach some limit, go the other way. Figure out how to slow down other traders by gumming up the systems everyone uses; you know all the exchanges' systems that the SEC is supposed to be ensuring provides everyone fair and equal access to. Jam them all up with crazy amounts of fake quotes to increase "latency" (the time it takes to get from A to B for a computer, for other people, like mutual funds and pension peons) so you can head fake them and get your own trades off.
- Get rich gaming the system!
Look, it's not even a 12-step program. Just eight simple steps.
You can do it yourself. No one will stop you.
It's all legal, you know.
And at that Senate Banking Committee hearing on September 20, you know, the one where a former HFT guy named David Lauer came to testify that the game is rigged in "their" favor, and how he was pissed because he didn't have enough money behind him to buy enough new technology and pay off enough exchanges to get the faster access and cooler algos so he could make the millions he wanted, which is why he got into the business in the first place, yeah, that guy - even he said the game is rigged.
Lauer didn't say it was illegal. Of course, he wouldn't incriminate himself. And the Senators, they all nodded that the game did look rigged, but because it wasn't illegal, they'd have to think about what they heard and see who would now donate what to their campaign finance algorithms.
Personally, I feel sorry for him - Lauer, the tattletale. He's obviously not good enough at what he was doing to compete. Poor fellow. I think he cut class the day they taught the lesson on "creative destruction." At least it looks like he made it to the lecture on tactical assault practices that obviously included "subtle carpet bombing" and "scorched-earth techniques."
But I digress.
There's nothing redeeming about high-frequency trading. Nothing.
Maybe I should write a real article on why it's a bunch of crap and who's really behind it?
Oh, I've done that. I did it two-and-a-half years ago, here at Money Morning.
Guess it's time to do it again. Look for it in your mailbox on Monday.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.