FULL DISCLOSURE: I was once in the camp of high-frequency
trading (HFT) supporters. But that changed on May 6, 2010 after the
U.S stock market's "Flash Crash."
After studying the arguments and facts, I've now come to realize
the existence of HFTs is unlawful and is a direct threat to the
fairness and stability of financial markets, far outweighing any
so-called benefits. Michael Lewis' new book "Flash Boys" only
confirms these facts.
Now, allow me to explicitly expose four bold-faced lies about
LIE #1: HFTs offer greater transparency in the stock
market and provide market liquidity.
By posting phony bids and offers on stocks exchanges
(NasdaqGM:QQQ), HFTs are able to extract information from real
buyers and sellers to use as an unfair advantage for themselves.
The only financial transparency that HFTs create is for their own
Stocks Really a Bargain?
What about HFTs providing market liquidity? This is standard
propaganda often promoted by the very stock exchanges that cater to
HFTs. Some academic literature, usually paid for by the colluders,
promotes the liquidity fairy tale too.
The sole existence of HFTs is to steal and cheat with their
illegitimate edge over other stock market participants. Whatever
market liquidity HFTs seemingly create, is purely incidental to
their other dishonest activities, which take priority.
LIE #2: HFTs have reduced the cost of trading and
investing for the greater good.
Never mind how HFTs have bid up the cost of data feeds coming
from major stock exchanges like the NYSE and Nasdaq
At the height of the 1999 boom in Internet stocks, the number of
price quotes surged to 1.3 million to 4 million a day with trading
volume sometimes flirting with 2 billion shares in a single
Fast forward to today.
During the first three months of 2014, the average number of
daily stock quotes skyrocketed to between 125 and 176 million per
day on average trading volume of two billion shares per day,
according to Nanex Research. That's 100 times more price quotes on
virtually the same trading volume as 1999!
Today, HFT firms have more than 1,000 complex order types at
their disposal and they are purposely clogging up the system. This
has added a pointless layer of complexity to financial markets,
thereby raising the cost of data processing and market
LIE #3: HFTs have lowered the risk in financial
Computerized HFTs account for around 50-70% of all U.S. equity
trading volume (NYSEARCA:IWM) thereby creating a massive "liquidity
This illusion is illustrated by the "Flash Crash" of May 6, 2010
when the Dow Jones Industrial Average (NYSEARCA:DIA) suddenly
crashed 1,000 points and mysteriously recovered within just a few
minutes. Who were the culprits?
Computer provoked volatility has created unnecessary chaos to
the point of destabilizing global financial markets to the
determinant of everyone. This is particularly true if the chaos
occurs during the last 30 minutes of the daily session when circuit
breakers are not active.
LIE #4: Securities regulators were and are unaware of
illicit HFT trading.
If the Securities and Exchange Commission (SEC) was completely
ignorant of illicit HFT trading, that would partially absolve them.
Is that the case?
After Brad Katsuyama, the main figure in Flash Boys, was probed
by the SEC, here's what an excerpt from the book says occurred:
"When he was finished, an SEC staffer said, "What you are
doing is not fair to high-frequency traders. You're not letting
them get out of the way."
As this quote shows, even low-level SEC staffers acknowledged
the existence of HFTs, which is a sure sign that high-level SEC
officials knew about it too. Even worse, how the SEC has and
continues to protect HFTs instead of protecting the investing
public. What happened to the fair and orderly markets the SEC is
supposed to uphold?
The HFT scandal is a classic example of the domino effect: Rogue
HFTs have been blessed by rogue stock exchanges who in turn have
been blessed by rogue regulators. None of this was supposed to
The SEC's adoption of Regulation FD (fair disclosure) doesn't
just apply to how publicly traded companies disseminate
information, but it also extends to how major stock exchanges - and
anybody with nonpublic material information - should operate.
Business Wire said on Feb.14 it would no longer allow HFT firms to
license direct feeds. Good for them.
Until major stock exchanges (NYSEARCA:VOO) take concrete steps
to stop the unfair and unlawful dissemination of big data to their
HFT colluders, I believe they will remain in violation of Reg.
Whether the SEC will choose to enforce its own rules, is another
Profit Strategy Newsletter
diffuses financial propaganda and keeps investors on the right side
of the market.
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