The math on trading is simple: It is a zero-sum game. One trader\u2019s gain is another trader\u2019s loss. Only in the case of HFT, the losers are the investors — by way of their pension funds, retirement accounts and institutional funds. The HFT\u2019s take — the \u201cskim\u201d — comes out of these large institution\u2019s trade executions.<\/p>\n
The technology behind HFT may be complex, but the math is that simple. Once the Securities and Exchange Commission allowed stock exchanges to share with traders all of the unexecuted incoming orders, it was hard not to make money by skimming a few cents or fractions of a cent from each trade. Several years ago, the founder of Tradebot, one of the biggest high-frequency firms, had said that the firm had not had a single losing day of trading in four years.\u00a0The firm\u2019s average holding period for stocks is 11 seconds.<\/p>\n
Any professional trader can tell you that his job is to manage risks. It is a statistical certainty that a percentage of trades will be losers. You are establishing a position with an unknown outcome. Sometimes they go your way, other times they go against you.<\/p>\n
How is it possible that one of the largest high-frequency trading firms executes millions and millions of orders for four years without ever having a down day? The short answer is what they do is not trading — it is skimming. I call it legalized theft. High-frequency trading is a tax on investors, encouraged by the exchanges, allowed by the SEC. It is prima facie<\/em> proof that something is amiss.<\/p>\n It is interesting to note that the rigging theme is consistent with everyone who looks closely at this subject. \u00a0\u00a0What is different is the ability of high-frequency traders to see other people\u2019s orders, jump ahead of them, and then sell that exact same stock to them, at a higher price. It is the ultimate market-skimming operation.<\/p>\n The specialist system that pre-dated HFT had its flaws, as we saw in the 1987 stock-market crash. But it also had one crucial redeeming factor: A human being stood ready, willing and able to make a market in a stock when other buyers and sellers disappeared. HFTs, on the other hand, have no such obligation. When things get rough, they unplug their machines. This makes their claims of added liquidity laughable. They are the centerpiece of a flawed system without any socially redeeming qualities.<\/p>\n Bloomberg reports: \u00a0 \u00a0 \u00a0 \u00a0On 60 Minutes\u00a0last night, author Michael Lewis made a bland assertion: High-frequency traders, he said, working with U.S. stock exchanges and big banks, have rigged the markets in their favor.\u00a0\u00a0The only surprising thing about Lewis\u2019s … Continue reading
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