Not only is this beyond ridiculous pandering to Wall Street, but it illustrates to whom our government serves. No Freedom of Information Act disclosures from the SEC after the new “reform” law. No press coverage of future scandals with what should be public information. We fund these entities continued existence through the public’s money and yet we have no right to see what they have done wrong?
High frequency trading, or more specifically flash orders, are practice of allowing certain market participants to pay a premium for access to order data (before it is placed on exchanges) and feeding that data to computers, allowing them to front run the trades of other market participants.
In effect, it is theft by using what should be privileged information. Most of the time institutions are targeted, but institutions often manage the retirements and pensions of Americans.
The great fabrication
We’re told by these high frequency trading companies that they’re providing liquidity to the market, enhancing price discovery and reducing slippage. The level of naivety necessary to believe these claims is unheard of.
First of all, to provide liquidity to the market these companies would have to provide a bid and ask that are not far apart. That is to say, if I’m buying a stock for $10.00 a share, I should expect a bid of $9.99 and an ask of $10.01. Anything more and the slippage potential is too great.
On Black Thursday, May 6th, 2010, we saw instead that the market makers ran for the hills, even their high frequency trading computers only knew how to offer the ask. Hence, the programs were selling anywhere they could and forcing the markets much lower.
To enhance price discovery high frequency traders would have to play fair instead of front running trades. When they front run a trade that there’s a lot of buyers on, the way they make money is to artificially raise the price. Instead of helping the market discover the actual value of a security, they are manipulating it for profit.
Black Thursday illustrated what can happen when computers run the markets without restraint. If high frequency trading lived up to its own hype it would have saved us from having such an event. Instead, it helped to cause massive losses and instability in stocks and other peripheral markets.
Theft is wrong
The only way to stop this unfair activity is to make it illegal. Anything short of a law that explicitly forbids high frequency trading will give the wiggle room that Wall Street can use to escape regulation and prosecution.
There’s no reason for a company to be able to pay for inside information on trades they can exploit to make a buck at someone else’s expense or claim to be a pillar of stability in the markets and fail completely right when we need it.
This activity is immoral and not a productive mechanism in a free market. Instead it is an alarming moral hazard and must be stopped before it brings down the market again.
The market has deteriorated significantly as news that the House vote failed to pass the bail out package crossed the newswires. At this point it may be unlikely that the bail out package passes or restores any confidence. This market is very oversold, but the path of least resistance in the interim and long term remains down. I am mostly cash and gold right now.
Karl Denninger is leading the charge to expose the risks of this bill to the American tax payer. See his opinion here: