High-Frequency Trading: Game the System and Get Rich in Just 8 Simple Steps

[Editor's Note: This insider's look at how high-frequency trading lets firms rake in billions in profits at the expense of individual investors was first published April 1 in Shah Gilani's Wall Street Insights & Indictments. To subscribe, click here.]

I don't know about you, but I'm ordering Michael Lewis' new book "Flash Boys: A Wall Street Revolt" - and I'm ordering it today.

Of course, Michael Lewis is the author of two of the biggest-selling books ever written about Wall Street: "Liar's Poker" (1990), an autobiographical portrait of excessively greedy bond traders during the 1980s, and "The Big Short: Inside the Doomsday Machine" (2010), which chronicles the housing bubble that led to the Great Recession in 2007.

While those earlier books captured how Wall Street excesses can lead to devastating losses for individual investors, Lewis' newest work aims to prove something even more damning - that the U.S. Stock Market, "the most iconic market in global capitalism, is rigged."

I'm looking forward to reading it.

And it looks like the FBI will be ordering a few copies, too.

Can the FBI Stop the High-Frequency Trading Charade?

Specifically, Michael Lewis' book is about high-frequency trading (HFT), a technology that allows certain firms to make billions in profits simply by "beating" investors to the exchanges.

The profits were so big that one firm, according to Lewis, spent $300 million building high-speed fiber optic cables between New Jersey and Chicago just to shave 3 milliseconds off the time the trades could be executed.

If you didn't catch the 60 Minutes interview with Michael Lewis Sunday, you can watch it here.

And late yesterday, the Federal Bureau of Investigation announced it would be investigating some of these financial-market "bad actors."

Of course, let it be known that I've been ranting about high-frequency trading since long before the "flash crash" in 2010.

In April 2010, in Money Morning, I wrote:

"The massive proliferation of exchange-traded funds (ETFs) that have become so popular with retail investors is also a major cause of the misleading stock-market volume statistics. And not because they are traded by investors, but because they are traded by a handful of privileged 'INSIDERS'."

I said it then, and I'll say it again: High-frequency trading is a total rip-off - and it does nothing for markets, unless you consider how it actually makes markets thinner, not more liquid.

And you want to know what's the most damning thing about it?

It's all legal. That's right - totally legal.

I believe it should be outlawed.


Regulators, namely the pimps and panderers at the Securities and Exchange Commission, and the various stock exchanges, all of them, are in on the game.

The game, known as HFT, isn't arbitrage. It isn't fair. And it isn't consistent with the keeping of "fair and orderly markets."

And that means it should be illegal.

Back in October 2012 I wrote an article here in Wall Street Insights & Indictments called Why High Frequency Trading Is A Scam.

In that article, I wanted to show you how you too can get rich gaming the system. All you had to do is follow the eight rules I laid out for you. It wasn't even a 12-step program. Just eight simple steps.

Well, since that time, nothing has changed. Not one iota.

So, let me share those rules with you once again:

  1. 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).
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. Get rich gaming the system!

Like I said, I've already ordered "The Flash Boys."

I'll read it and review it for you as soon as I'm done with it...

Next: We found a digital payments stock that could surge 50% in just two years. And it's the best play in a trillion-dollar market.

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.

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