UNDERNEWS

Undernews is the online report of the Progressive Review, edited by Sam Smith, who covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

July 28, 2009

A NEW WALL STREET FRAUD

Open Left - Over the weekend the high frequency trading story exploded. HFT is when large traders place their own trading computers in exchanges. Doing this gives them a very slight (microseconds) speed advantage over anyone who doesn't have their computers co-located. Not only do they have a slight speed edge, in exchange for a fee they see orders slightly (a few microseconds) before other traders. They use this speed advantage to front run slower investors. In addition, they issue and then cancel orders to see what prices other traders are willing to pay. Using their speed advantage they can then, if they, for example, see you want to buy X stock at $5 or less, and it's trading for $4.80, buy it before you and sell it to you at $5, capturing the profit in between.

About 50% of market volume is now high frequence trading. Large firms front running smaller traders, engaging in strategies normal traders can't engage in, to make sure that they make small profits on as much of the business going on as possible, all the while creating the illusion of real stock market activity when there is half the fundamental demand that there appears to be.

Fleecing sheep and manipulating the market seems to be the mild way to put it.

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