Posted on 07/24/2009 10:28:50 PM PDT by FromLori
Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer. High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there...
It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks.One second after the market opened, shares of Broadcom started changing hands at $26.20.
The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are suppose to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.
In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise. Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.
The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.
Sounds like front running to me. The entire NYT story is here.
Related
http://market-ticker.denninger.net/archives/1261-More-On-High-Frequency-Trading.html
http://www.nytimes.com/2009/07/24/business/24trading.html?_r=3&partner=rss&emc=rss
They are banking bail-out funds. face it. Buffett got $4 billion profit on $5 billion in what? a year?
That’s not investing—that’s gaming the system. I have even less respect for their financial acumen than I did before. I’m beginning to think many of the big investment banks are full of crooked salesmen and three card Monte dealers.
Those with the most sophisticated and fastest programs and equipment will go to the fore no matter what.
My beef is allowing short selling at all. It is a cheat from every angle allowing phoney supplies of stock to be sold.
I believe the stock market anymore is just a huge manipulated casino.
If you need to invest, just buy ammo that will be in demand. The price keeps going up, as does the demand. I wish I would have invested $thousands in ammo 15 years ago to resale today. I would have made a fortune. It’s a guaranteed high rate of return on investment. IMHO, it’s a better investment than Gold, because it NEVER decreases in value or demand.
The only issue is storage if you want to possess massive quantities of it.
Agree did you see the survivalists story?
http://today.msnbc.msn.com/id/32108020/ns/today-today_people/
Completely fraudulent.
Yes, I have read/seen that.
I hadn’t read that(I think I was pinged to it earlier).
Thanks for the heads up!
I have long believed that the following rules need to be put in place:
1) Companies need to post monthly (not quarterly) earnings reports
2) Stocks and bonds must be held a minimum of 1 full trading day before they can be sold after purchase
3) No trading of the stock during the following trading day after earnings announcement
4) 12 hr trading days starting at 8 am EST and ending at 8 pm EST
5) Margin accounts limited to 50% of tangible, liquid asset value and settled daily
6) Derivatives must be supported by a tangible asset (stock, bond or commodity, etc)
The Blue states are stealing from the Red states. Blue States = Big Banks + unions + Bloated Government. Red States = Small Business + Entrepreneurs + non-union workers.
LOL. I count about 10 comments on this thread by people who have no clue about that which they yammer.
HFT is peanuts. The big bucks made by GS and other proprietary traders have always been made on positions which are held for weeks or months, not seconds or milliseconds.
The NYT propaganda (about $50, wow!) is laughable. No “slow moving” mutual fund enters a market order, they buy it at 21.00 on a limit order. Which triggers nothing and they get all they want at 21.
Even the BRCM example in the article is ridiculous. You’re talking about 10 or 20 cents, if anyone is dumb enough to chase something. People who do that will be broke anyway soon enough, and nobody cares anyway except extremely short-term traders.
Whether flash order flow should be available is another question. In the meantime, it is and if you want to see it you have to pay for it.
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