Sharemarkets rigged by trading robots Date: April 27, 2014 David Potts
Even the FBI is pursuing them after the publication of the Michael Lewis' book, Flash Boys, a true story of high frequency traders fixing sharemarkets. How the FBI is going to arrest a robot I don't know. Computers that trade at lightning speed, unsupervised, save for the algorithm programs in their software to the point they can initiate their own trades, do have the jump on everybody else. Except maybe other robo-trading computers, that is.
They see all the other orders plus announcements to and from the ASX a millisecond before everybody else - still long enough to make a killing. They can also manipulate the market with fake orders that would be illegal for a broker.
If high frequency traders could find a way of trading faster than the speed of light they would, in which case, according to physicists, we would fall into a black hole or a parallel universe or something. But let's worry about that when it happens.
As well as the FBI, various US regulators, state attorneys, the city of Providence and goodness knows who else have also joined the chase. There would be a shareholder class action too, except it's dastardly hard to prove exactly who was mugged.
High frequency trade has been likened by Bell Potter's Charlie Aitken to legalised scalping. Gazumping more like it.
Think of it as buying four tickets online to a game costing $25 each, but half way through your order the price jumps to $26 for the last two tickets you want because somebody else has got ahead of you.
Nobody has been able to put a figure on how much is being skimmed but Lewis reckons it is as high as $US22 billion ($23.7 billion) a year in the US.
The trouble is it's not clear who's being ripped off. Day traders, yes. They thrive on small price changes but if the computer gets ahead of them, their potential profit must be smaller.
The higher buy and lower sell prices will be just a few cents at most, so ordinary shareholders are only slightly worse off. And all that extra commission the ASX earns from robo-trading has probably cut the cost of brokerage anyway.
But when it comes to your super fund the number of shares involved is so much bigger and must cost them.
Another reason there's no credible figure on how much robo-trading is skimming from super funds and ordinary shareholders is that by stepping up the number of trades, it also makes the market more liquid and that reduces the gap between buy and sell prices.
Ah, just pause it there for a moment. It's when the market takes a big dive you need liquidity the most. So what happens? You won't see high frequency traders for dust. Witness the times robo-trading dragged Wall Street down 1000 points in 20 minutes, or slashed QBE's share price, then trading at $15.70, to less than one cent.
It can be crazy at times but is the market really rigged? You bet, and it always has been.
Once it was brokers with operatives closest to the chalkies who jumped the queue. Now they've been replaced by robots.
