Start the conversation
The rats are fleeing their listing ships…
Of course, that's not surprising.
The Financial Times reported yesterday that high-frequency traders are leaving investment banks for hedge funds, prop trading houses, and their own startups.
Oh, you didn't realize that regular, Too Big to Fail investment banks had high-frequency trading desks?
Surprise, surprise, surprise…
High-frequency trading isn't the exclusive purview of specialized trading shops.
High-frequency trading is a proven money-raking machine, and today I'm going to tell you that's why it's part of most so-called investment banks' trading operations…
How High-Frequency Trading Is Done
High-frequency trading (HFT) is a complicated game – um, I mean, business model.
Super-smart computer scientists design mega-fast machines that intercept trading orders from the airwaves or cable conduits. Their machines read these orders – the orders you send to your discount broker, the orders institutions send to dark pools – everybody's orders.
And before all those orders can be brought together and matched up so a trade gets executed, high-frequency traders pick off the orders they want.
They also send out their own orders – billions of them every day.
In fact, this business model is worse than you think. Get all of Shah's Insights & Indictments before the next batch of orders gets picked off right here.
Now, they don't want these orders executed, but want other machines to see their orders and move after them, which are canceled before they can be acted on.
It's about faking out other traders' machines to set them up to be picked off.
But what's the endgame?
Insider trading. Legalized insider trading.
These aren't tips from an insider. It's trading on inside data flows that aren't protected, but sold to HFT desks to be traded against, with an advantage that only the HFT players have.
But things aren't so cushy anymore…
HFT Players Are Feeling the Pressure Now
The HFT rats are fleeing the TBTF ships because of the Volcker Rule.
The Volcker rule, which has to be implemented by July 2015, puts an end to certain "proprietary" trading. Proprietary, or "prop," trading is that done for the house and not on behalf of any clients.
Yes, banks trade for clients. And yes, banks are liars about trading for clients by taking the other side of their clients' trades and not calling that what it is… prop trading.
Anyway, prop trading is going to get a closer look as we get to July 2015. European banks are looking at maybe two years before they get their own Volcker-type rules.
So, the rats are leaving their listing ships (they're listing because their trading revenue streams are going to dry up) for swamps where they can run wild and get paid what they're worth.
There's Good News and There's Bad News
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.