by Mike Whitney
April 19, 2010
The Securities and Exchange Commission (SEC)
knows that High-Frequency Trading (HFT) manipulates the market and
bilks investors out of tens of billions of dollars every year.
But SEC chairman
Mary Schapiro refuses to step in and
take action. Instead, she's concocted an elaborate "information gathering"
scheme, that does nothing to address the main problem. Schapiro's plan - to
track large blocks of trades by large institutional investors - is an
attempt to placate congress while the big Wall Street HFT traders continue
to rake in obscene profits.
It achieves nothing, except provide the cover
Schapiro needs to avoid doing her job.
is algorithmic-computer trading that finds "statistical patterns and pricing
anomalies" by scanning the various stock exchanges. It's high-speed robo-trading
that oftentimes executes orders without human intervention. But don't be
confused by all the glitzy "state-of-the-art" hype.
HFT is not a way of "allocating capital more
efficiently", but of ripping people off in broad daylight.
It all boils down to this:
HFT allows one group of investors to see the
data on other people's orders ahead of time and use their supercomputers
to buy in front of them. It's called front-loading, and it goes
on every day right under Schapiros nose.
In an interview on CNBC, HFT-expert Joe
Saluzzi was asked if the big HFT players were able to see other
investors orders (and execute trades) before them.
"Yes. The answer is absolutely yes. The
exchanges supply you with the data, giving you the flash order, and if
your fixed connection goes into their lines first, you are
disadvantaging the retail and institutional investor."
The brash way that this scam is carried off is
The deep-pocket bank/brokerages actually pay the
NYSE and the NASDAQ to "colocate" their behemoth computers ON THE FLOOR OF
THE EXCHANGES so they can shave off critical milliseconds after they've
gotten a first-peak at incoming trades. It's like parking the company
forklift in front of the local bank vault to ease the transfer of purloined
Due to the impressive research of bloggers like
Zero Hedge's, Tyler Durden and Market Ticker's, Karl Denniger, many people
have a fairly good grasp of HFT and understand that the SEC needs to act.
But Schapiro has continued to drag her feet while issuing endless
proclamations about pursuing the wrongdoers. Baloney. She needs to stop
yammering and shut these operations down.
In a recent posting, Market Ticker explained some of the finer-points of
high-frequency trading, such as, how the banks/brokerages probe the
exchanges with small orders in order to find out how much other investors
are willing to pay for a particular stock.
Here's a clip:
"Let's say that there is a buyer willing to
buy 100,000 shares of Broadcom with a limit price of $26.40. That is,
the buyer will accept any price up to $26.40. But the market at this
particular moment in time is at $26.10, or thirty cents lower.
So the computers, having detected via their 'flash orders' that there is
a desire for Broadcom shares, start to issue tiny 'immediate or cancel'
orders - IOCs - to sell at $26.20. If that order is 'eaten' the computer
then issues an order at $26.25, then $26.30, then $26.35, then $26.40.
When it tries $26.45 it gets no bite and the order is immediately
Now the flush of supply comes at $26.39, and the claim is made that the
market has become 'more efficient'."
Nonsense; there was no "real seller" at any of
This pattern of offering was intended to do one
and only one thing - manipulate the market by discovering what is supposed
to be a hidden piece of information - the other side's limit price!
With normal order queues and flows the person with the limit order would see
the offer at $26.20 and might drop his limit. But the computers are so fast
that unless you own one of the same speed you have no chance to do this -
your order is immediately "raped" at the full limit price!
The presence of these programs will guarantee huge profits to the banks
running them and they also guarantee both that the retail buyers will get
screwed as the market will move MUCH faster to the upside than it otherwise
If you're wondering how Goldman Sachs and other "big banks and hedge funds"
made all their money this last quarter, now you know." ("High-Frequency
Trading is a Scam", Market Ticker)
The HFT uber-computers are able to find out the highest price that traders
will pay in a millisecond and then extort that full amount millions of times
to maximize profits. Clearly, this has nothing to do with efficiency
or innovation. It's high-tech highway robbery; institutional
bid-rigging on a grand scale, tacitly sanctioned by industry lackeys
operating from within the administration.
Schapiro was picked by
Obama for this very reason; because she was known as a regulator
with a "light touch" when she headed Finra the financial industry's self
policing agency. As Finra's chief, Schapiro managed to keep her head in the
the Madoff scandal and the auction-rate
She also issued far fewer fines and penalties
than her predecessor.
an excerpt from the Wall Street Journal
which sums up Schapiro's regulatory doctrine:
"The Financial Services Institute, a trade
group, was meeting, and Ms. Schapiro addressed the crowd about Finra’s
efforts to fight frauds aimed at senior citizens. Frank Congemi,
a financial adviser, asked what Finra was doing to regulate “packaged
products” such as complex mortgage securities.
Mr. Congemi says that Ms. Schapiro replied:
“We have rating agencies that rate
The credit-rating agencies, by this time,
were being heavily criticized for having given triple-A ratings to
mortgage bonds that became unsalable as foreclosures rose."
If the financial crisis has taught us anything,
it's that the system is NOT self-correcting. And it takes more than just
It takes regulators who are willing to