This is a bit long but well worth the read. Now, is there anyone on our patch who is listening ...?
REGULATORS FINALLY SEE EVIL IN ROBOTRADING By Glenn Hall 09/02/11 - 10:13 AM EDT
NEW YORK (TheStreet) -- It took long enough, but regulators have finally recognized that robotrading poses a massive and uncontrolled threat to the stability of the markets. Robotic fingerprints have been all over every crime scene in the markets since the so-called "flash crash" last year. Machine trading that can submit and pull phantom orders in picoseconds -- we're talking about one trillionth of a second here -- can be used to trick unwitting counterparties into a bad trade. This activity, with the understated name of "high-frequency trading", turns into a machine feeding frenzy every time stocks start to gain any momentum. That's how the programs work. Rocket scientists -- who really should be doing something more productive with their brain power -- have programmed complex algorithms to respond to technical signals in the market and start executing rapid-fire orders. Every trading shop has its own special formula devised by its own team of rocket scientists, resulting in the market equivalent of computer gang wars, pitting the mathematical geniuses behind these programmed trades against each other to squeeze value out of slight differences between bid and ask prices. The way I see this, it's like a leaky faucet. No one pays much attention to it but all the drips add up to a flood. The big difference is that with high-frequency trading the leaks in the system turn into hefty profits for the owners of the machines, stealing value out of the market one picosecond trade at a time. I thought regulators would finally discover the evils of high-frequency trading last year, when the Dow lost almost 1,000 points in a single, ill-fated day in May. At the time, I wrote a column called "Stop the Machines! Save the Dow". It took more than a year, but regulators finally appear to be getting serious about investigating suspicious market activity by high-frequency trading firms and are demanding that the firms reveal HFT computer secrets so that they can be scrutinized. Defenders of machine trading like to say that faster trades help to keep the market in balance by making it more efficient and that machine trading lowers costs for everyone. I don't buy it. Why do we need trades to be executed in one millionth of a millionth of a second? No one can think that fast. There is too much risk when the machines take control and humans can't turn them off fast enough. According to research by Jim McTague, the Washington editor over at Barron's, a single day of high-frequency trading is like 30 years in human trading terms. Worse still, thanks to computer trading systems, 2% of market participants generate 70% of equities volume, according to McTague. That means a small band of rocket scientists is playing the rest of us for fools. That's just wrong. Rocket scientists don't come cheap and this kind of tomfoolery tends to be concentrated in places like Goldman Sachs (GS_) that already have tremendous power over the markets through the sheer size of the trades they can execute. Dick Grasso, the former head of the NYSE, says it's simply not fair to let big traders with fancy computers get better prices on trades than everyone else: We've been warned before. Back in July 2009, Tyler Durden posted the following caution on the Zero Hedge blog citing no less an authority than the head of JPMorgan Chase (JPM_)'s algorithmic product desk: "When JP Morgan discusses high frequency trading, people listen. When the head of JP Morgan's algorithmic product desk Carl Carries says that high frequency trading is merely a form of parasitic market making, people should run for the hills." Parasitic - that's exactly how I see it. Robotraders are parasites leaching value out of the markets and destroying the very premise of stock ownership. As I've argued before, stocks are for people, not machines! --Written by Glenn Hall in New York.
