Monday, April 7, 2014

HFT Scandal: Why Do Exchanges Still Ignore Cheaters?

News flash: Major stock exchanges and high-frequency traders (HFTs) have been acting in collusion. It's been going on for a while, but it now seems the mainstream press has just learned about this.  

A recent “60 Minutes” episode featured author Michael Lewis talking about his new book, “Flash Boys,” and why he believes the stock market is rigged.

Actually, none of this is new. In his 1970 best seller titled “Wall Street Jungle,” Richard Ney exposed the dirty mechanics of the NYSE’s market specialist con. He wrote, “One of the specialists’ greatest advantages over the average investor is that the specialist is in the right place at the right time.”

Today, the same thing can be said about HFTs.

Although the role of the market specialist and HFT are distinctly different, the outcome of both groups always winning while the investing public always loses is the same.

The previous era of low-tech cheating has simply been replaced by high-tech cheating with software algorithms. 

In this case, stock exchanges allow high-speed traders the privileged access of buying faster data streams and putting their computers close to stock exchange data centers. This gives HFTs a significant edge by trading stocks milliseconds ahead of the public.  Why don’t major stock exchanges crack down on HFTs? Because HFTs are clients of these very exchanges and pay millions of dollars for their privileged front seat! 

How pervasive is high-speed trading? HFTs account for around half the share volume in the U.S., according to some estimates.

Although Ney’s work has been forgotten because of the shift away from centralized floor trading to today’s era of decentralized electronic trading in securities (SPY), his ultimate message still rings true today: Stock exchanges behave in a manner that is detrimental to the individual investor.

For Ney, comparing stock market exchanges and criminals wasn’t too radical. He wrote: “Hidden behind the façade of pompous jargon and noble affections, there is more sheer larceny per square foot on the floor of the New York Stock Exchange than any place in the world. Cleary, the lunatic economics of this larceny appeal to the criminal.

“The story is told that after he had been deported to Italy, Lucky Luciano (a famous mobster) granted an interview in which he described his visit to the floor of the New York Stock Exchange. When the operations of the floor specialists had been explained to him, he said, ‘A terrible thing happened. I realized I joined the wrong mob.’”

Stocks & Scandals

Anybody who owns stocks gets hurt, as HFTs find out which stocks people want to buy and then front run by purchasing those stocks first and selling them back at a higher price.

Imagine if you wanted to buy four concert tickets for $50 each, and the online marketplace only let you buy two tickets at that price. After you make your purchase, the other two tickets that weren’t available (allegedly) are now available but for $60 each. That’s the kind of multibillion-dollar manipulation that’s happening every single day in the stock market.

Contrary to what’s been reported, electronic trading has not completely leveled the playing field. In fact, certain academic literature (propaganda) promotes the false idea that HFTs are required for the “efficient operation” of the stock market.

The HFT scandal is another example of the colossal failure by financial regulators, who after the Madoff scandal, continue failing to protect investors.

Why hasn’t the lead commissioner (Mary Jo White) at the Securities and Exchange Commission lost her job over the HFT scandal? How much further financial damage must the investing public face before the illicit relationship between stock exchanges and HFTs is finally crushed? 

Until then, the money stolen from many will continue to be divided among an elite few.   

 

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