No one has ever claimed that the financial markets
are a level playing field. Equities, bonds, currencies, options and futures are not arenas that operate by equivalent standards
for all parties. Great fortunes were built not by chance, but on superior information, known to the few. Professional traders
are not risk gamblers, but operate on the premise of special advantage. Through advance and proprietary techniques that reduce
exposure hazards and provide exclusive head start triggers, which virtually guarantee profits, the elite firms dominate Wall
Business Week states in the article, Is High-Frequency Trading Insider Trading?, that
“Classically defined, insider trading means having access to material, non-public information before
it reaches the rest of the market; it’s like getting a heads-up about a merger before it’s announced, or maybe
a phone call from a Goldman Sachs (GS) board member saying that Warren Buffett is about to invest $5 billion in the
With the introduction of super
computers and Financial Algorithmic Trading, the era of generated trading strategies emerged that fill automatically, when
predetermined prices are reached. Some would argue that exchanges were simply applying the latest technology to the time honored
system of flipping positions.
Now we live
in the High-Frequency matrix, based upon millisecond reactions, which activates on information that is not offered to everyone
at the same time. Forbes explains accordingly in High Frequency Insider Trading - And It's Completely Legal!
to a team of Wall Street Journal reporters from an article on June 12, the practice works to the advantage of professional traders. “Economic
reports from public universities, trade groups and other nongovernmental organizations can move markets as surely as official
data from the U.S. government,” according to the Journal’s team of four reporters: Brody Mullins,
Michael Rothfeld, Tom McGinty, Jenny Strasburg. “But unlike government reports, where pains are taken to make certain
no one gets them ahead of time, few rules control release of nongovernmental economic reports. Unknown to many investors,
selling early access is routine.”
to this highly valuable information is the key. And such access comes at a price. Rapid traders pay information companies
like Thomson Reuters thousands of dollars each month for a look at such reports, moments before they are widely disseminated.
And it’s in those few key seconds, that they make their killing.”
Seemingly, this high-tech access to supercharged information is the newest version of insider information.
The following assessment is also from the same Business Week account.
“New York Attorney General Eric Schneiderman has called HFT “insider trading 2.0″ on
a number of occasions. His office is looking into the relationships between traders, brokers and exchanges
and asking whether it all needs to be reformed. The FBI spent the last year looking to uncover manipulative trading practices
among HFT firms; the federal agency is now asking speed traders to come forward as
Chicago is not much different
from their Wall Street exchange cousins. Litigation over this practice is referenced in the report, CME Sued For Giving "High-Frequency Traders Peek At Market" Since 2007.
a lawsuit that was just filed by lead plaintiff William Charles Braman, seeking class-action status, and filed on behalf of
all users of real-time futures market data and futures contracts listed on the CBOT and CME from 2007 to now, the CME is alleged
to have sold order information to high-frequency traders ahead of other market participants.
Apparently it took the general public a Michael Lewis book to reread out post from
October 2012 in which we showed that an estimated over 30% of CME revenues were made from HFT - in other words from selling
proprietary data in direct feeds to high-paying subscribers, that hits collocated servers ahead of the consolidated tape.”
Well, what the layman would see as obvious, influential
security lawyers see as neat ambiguity. The Forbes story continues.
“But it is legal, and so is trading on the advance peeks,” the Journal reported. “Even
as securities rules bar companies from selective data disclosure, and as authorities vigorously pursue insider trading in
all its forms, no law prevents investors from trading on nonpublic information they have legally purchased from other private
entities. Trading would be illegal only if the information was passed through a breach of trust, said securities lawyers.”
It should be clear that the financial system is designed
to accommodate creative and innovative methods of price manipulation. The defenders of “Crony Capitalism” see
such stratagems as a 21th century sophisticated version of robber baron corporatism, in the fine tradition of Jay Gould and
James Fisk. Clipping an ensured few cents on billions of transactions is surely a slick system.
Fabricating automatic returns is bad enough, but what is the public risk of producing
a real panic when High-Frequency momentum turns into a full propelled blow off?
When a robot computer generates buy or sell orders, the difference between winning
and losing is based upon the speed of the information used to place and execute orders. If your algobots taps into info, not available to the entire market, the game is rigged.
Matthew O’Brien in Everything You Need to Know About High-Frequency Trading, makes a valid point.
“Every HFT strategy depends on not only being faster than ordinary investors, but being faster than
each other too. Anytime somebody comes up with a new way to cut a few microseconds—that is, a millionth of a second—off
of trading time, they have to spend whatever it takes to do it. Otherwise, they'll lose out to their competitors who do.”
Imagine this disconnect with real economic reality
that place trades, with little concern if it is a long or short. Only the speed matters. The conclusion from the Negotium
essay Financial Algorithmic Trading, holds true. “Banning the interconnect of proprietary programs that amalgamate
directly into the systems on the floor of the exchanges is the only way to prevent the integration of systemic collusion among
the 1 and 0 computer programs.”
Hall – April 16, 2014
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