Why High-Frequency Trading is a Scam
Let me make this perfectly simple…
High-frequency trading is a scam. It should be outlawed.
Period.
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, at Money Morning.
Guess it’s time to do it again. Maybe I’ll call it my new high-frequency muckraking series on HFT B.S. (Think my publisher will go for that?)
Does this mean that the sleaze balls that do this are smarter than the regulators at SEC or (goes without saying) Congress?
– Robert
If one is winning then he is smarter. When he loses then someone else is smarter. When dummies win, it’s called luck. The difference is that a fool and his money are soon parted.
What regulators at the SEC?
Those guys watching midget porn on our dime … they aren’t “regulators.” They’re co-conspirators. They’re paid to PRETEND to protect us … while they look the other way.
So much for regulation. Caveat emptor baby.
Why High-Frequency Trading is a Scam http://t.co/DXVGksfE
Why High-Frequency Trading is a Scam | Shah Gilani’s Wall Street Insights and Indictments http://t.co/kojaIJ82
Does it mean that the sleaze balls that do this are even more corrupt than the regulators at SEC or (goes without saying) Congress?
Is it out of the realm of reality to suggest a class-action lawsuit on behalf of the class of investors who have no access to HFT.
Besdides ending the practice, any monetary recovery can go to a designated charity for medical research of lethal diseases or to children’s hospitals.
Yes, Franco. I think you have something. These crooks should have been hauled up on the carpet years ago. HFT is the main reason that I have not been overly active in trading. You can put a stop loss on your trade and the HFT crooks will stop you out. Unless you are on your computer, trading all day, it is almost impossible to compete against these crooks. It reminds me of the old movie “The Sting”, with Paul Newman and Robert Redford. It is almost the identical scam that these HFT crooks are playing. Someone has to start a class action suit against these guys since the politicians are obviously not going to do anything about it.
I agree, a class action law suit should be filed. What other ways are there to stop this unfair practice of HFT? Perhaps like the AARP we should have an e-mail campaign to send e-mails to all citizens with the e-mail address of their legislators so they can send an e-mail letter to the legislator demanding this practice be stopped.
I’m new to trading. Is there something like a traders union to represent us in Washington?
HFT is sleaze ball activity and has huge impact and unduely so. Any stock can be hugfely impacted by HFT. Hell, all the big fund managers and Senators and Congressmen trade on inside info. Just read Bloomberg Magazine report dated Nov 29, 2011.
I suspect that too many people in positions of power to do something are on Wall Street’s payroll to really take this seriously. I suspect that all the major firms and banks are involved, the same ones who also contribute to political candidates. Maybe we should hire some good hackers, like Anonymous, to attack HFT computers, or have someone launch a DNS attack on their machines. Oh, that would be illegal wouldn’t it ?
What a lovely idea………….screw the whole stinking
system…………………………
It’s an oversimplfication, I’m sure, but it is this sort of thing which is eating away what’s left of the economy. There’s no trust whasoever, and the truth is that these kinds of slimy people compose a large part of the business community..
In a nation increasingly bereft of integrity, honor, or a sense of morality, where take the money and run has become the national anthem, we will have to restore some semblance of justice or watch the country become a rag picking society.
There are places in the world where these kinds of people would be shot, and I would be first to volunteer for the firig squad.
I think there are a good many honest and perceptive comments here.
We are still ‘behind the curve,’ if Shah posted something like this two years ago why are we still in this position. Ron says “..this sort of thing which is eating away what’s left of the economy.”
I would say it’s eating away at the fabric and soul of the nation. Very bad.
The loose connection between politicians and high finance reminds me of a video I saw where Ronald Reagan was making one of his first speeches after election, the ‘Fed’ adviser (forgot his name) Leans forward and is heard to say “Hurry it up!” He said it in a growl as though he was talking to a dog! It shocked me to see such naked power over a newly elected president. I shall never forget it!
The only people that can sort this out are the electorate themselves.
Politicians are in too deep amongst the gravy to want to put a stop to it.
Of course, there would be tax revenue somewhere amongst the profits to consider as well.
Donald Regan, I think was the person, from Citibank, I believe.
It probably is illegal if you bring an action under the RICO Statute. Which broadly defines fraudulent actionable conduct as any scheme or device intended to decieve some person or persons out of his her money. It is a catch all net and very inclusive. Someone with money and legal talent could really upsent the industry maybe even bring a class action unless the courts have been bought which is not unheard of.. You could even sue the regulatory agencies and make them co conspirators. That would upset a lot of bureaucrats. Have fun.
Like everything else on the free market HFT is born from the opportunism capitalism so much admires. I take it none of the posters here who decries HFT as a scam will vote Romney/Ryan because they stand for a totally free market, little regulation and small government. It all implies anything goes, no or very few rules and few people needed to enforce the few rules. As if the shocks and lessons from the sub prime mess does not mean anything. Do we really want to go through all this again with HFT.
A typical leftist view of freedom is to blame an ABUSE of freedom on the freedom itself. It is certainly possible to police destructive behavior with smaller government and less regulations, we did so in this country for many years. The problem is that it requires intelligent adults with integrity and a spine. Try finding that combination today!
Are these systems making rich people richer,
or poor people richer?
Or rich people poorer?
or honest people dishonest?
Where does all the money go?
That’s what I’d like to know
Have we over romanticized the market? Are there numbers on; money actually invested in new share offerings ( what we think the market is for ), Money traded and held on old shares for the purpose of speculation or earnings, Money used in HFT or other spec daily trades and the net returns/losses. Maybe the indexes would be better posted on the wall in Vegas and removed from the evening news.
TheTobin tax would fix this abuse immediately
HFT (high frequency theft) will never be outlawed as long as outlaws make the rules. I see CNBC reports million upon millions of dollars are being taken out of funds each month. I sold all my mutual funds earlier this year. I will not be their muppet! Start a movement to educate people..and the movement should have its goal to get people OUT of the markets. SELL BABY SELL…AND SELL…AND SELL. That is the only way to hurt the bastards. BTW—I now have invesments making 15% guaranteed per anum with no risk. I am doing WAY MO BETTER than the market can promise me! PLEASE–start a website dedicated to get people to dump all their stocks and mutual funds. That would be wonderful. As for HFT ( high frequency theft)–they can’t steal from you if you arent in the market! Thanks Shah…I really appreciate your contribution to us little guys.
JB
Shah Gilani: why High Frequency Trading is a scam…..
http://t.co/Hr6oyEtA
Modern day finance is usury. Fractional reserve banking is slavery. Private central bankers own most of the world and elicit an entirely controlled economy. The Bankers are assassins, they have assassinated or attempted assassination of every President who attempted to arrest control of the country back from them. Kennedy, Lincoln, Reagan, Cleveland, Jackson etc.
Christianity, in it’s beginning, understood that interest charged on loans was considered usury. The International Bankers sponsor war, drug cartels, sex slavery, prisons for profit, monopolies and corrupt cops. The potential for mankind has been arrested and devolving and will continue to do so until we route out these vipers from power.
To Ken..
As long as Wall Street.. .most other financial institutions… as well as Congress is either owned or controlled by predominantly JEWISH interests.. NOTHING will EVER change. I
t’s time to cal la spade a spade! ! !
The entire New York Stock Exchange is a scam:
http://www.lewrockwell.com/blog/lewrw/archives/33424.html
i havea question.. is this what is commonly known as ”day trading” with several computers set up?