Thread: The Odds Are Never In Our Favor

---

The Odds Are Never In Our Favor

Posted: 31 Mar 2014 03:06 PM PDT

How would you feel if you went to the store to buy something, and someone rushed ahead of you and purchased it first and then sold it to you at a higher price? Well, in the financial world this happens millions upon millions of times. In fact, this practice has become so popular that it has spawned an entire industry known as "high frequency trading". At this point, high frequency trading makes up about half of all trading volume on Wall Street, and it is costing the rest of us billions of dollars a year. And the funny thing is that this is all perfectly legal. High frequency trading firms are exploiting a glitch in the system, and by allowing this to go on, the authorities have essentially given them a license to steal from the rest of us. Sadly, this is just another example that shows that the odds are never in our favor. The "little guy" never seems to be able to win, and those at the top of the food chain like it that way.


Making money in the stock market is supposed to be about making wise investment decisions. It isn't supposed to be about finding a glitch in a video game and exploiting it. But that is essentially what these high frequency traders have done. They have spent an extraordinary amount of time and energy figuring out ways to make pennies (or sometimes just fractions of a penny) on the trades that the rest of us make.



Fortunately, this practice was exposed in front of the entire world by 60 Minutes the other night. Steve Kroft interviewed a former trader named Michael Lewis that just released a new book entitled "Flash Boys" that is all about the evils of high frequency trading. The following is an excerpt from that interview...

Steve Kroft: And this is all being done by computers?
Michael Lewis: All being done by computers. It's too fast to be done by humans. Humans have been completely removed from the marketplace.
"Fast" is the operative word. Machines with secret programs are now trading stocks in tiny fractions of a second, way too fast to be seen or recorded on a stock ticker or computer screen. Faster than the market itself. High-frequency traders, big Wall Street firms and stock exchanges have spent billions to gain an advantage of a millisecond for themselves and their customers, just to get a peek at stock market prices and orders a flash before everyone else, along with the opportunity to act on it.
Michael Lewis: The insiders are able to move faster than you. They're able to see your order and play it against other orders in ways that you don't understand. They're able to front run your order.
Steve Kroft: What do you mean front run?
Michael Lewis: Means they're able to identify your desire to, to buy shares in Microsoft and buy 'em in front of you and sell 'em back to you at a higher price. It all happens in infinitesimally small periods of time. There's speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But it''s enough for them to identify what you're gonna do and do it before you do it at your expense.
Steve Kroft: So it drives the price up.
Michael Lewis: So it drives the price up, and in turn you pay a higher price.

You can watch the entire interview right here.* Unlike most mainstream media news reports, this one is actually worth your time. I have watched the entire thing, and I highly recommend it.


Of course there have been many that have been screaming about high frequency trading for many years. Zero Hedge is just one example. This practice has gone on year after year and the federal government has looked the other way.


These high frequency trading firms do not add anything to society. As Barry Ritholtz noted recently, one of these firms has an average holding period for stocks of just 11 seconds, and at one point it stated that it had "not had a losing day of trading in four years"...

The only surprising thing about Lewis’s assertion was that anyone could be even remotely surprised by it.
The math on trading is simple: It is a zero-sum game. One trader’s gain is another trader’s 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’s take -- the “skim” -- comes out of these large institution’s trade executions.
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 losing day of trading in four years.” The firm’s average holding period for stocks is 11 seconds.

How in the world does that kind of behavior add any value to society?


They are just skimming money that should be going to others. Billions of dollars is essentially being stolen from pension funds and retirement accounts, and it is time that people started getting outraged about this.


Unfortunately, even if this practice is outlawed, the truth is that the odds will still never be in our favor.


There are millions of Americans that dream of getting ahead, but they never seem to be able to get there. They work incredibly hard, but the more they earn, the more the government taxes them. If somehow you do manage to scrape together a little bit of money to invest in the financial markets, any profits that you make will be endlessly eroded by fees, commissions and even more taxes.


And it is important to remember that in the financial world, the "little guy" is regarded as easy prey by the hungry wolves that are all too eager to find a way to transfer your money into their own pockets. If you don't know what you are doing, it is all too easy to get absolutely slaughtered.
On Wall Street, there are winners and there are losers.


Most of the time, "the little guys" end up losing.


But at least they could try to have a system that at least has the appearance of fairness. As long as high frequency trading exists, that will never be the case.

http://theeconomiccollapseblog.com/a...r-in-our-favor


*You can watch the entire interview right here

Is the U.S. stock market rigged?

Steve Kroft reports on a new book from Michael Lewis that reveals how some high-speed traders work the stock market to their advantage

• 2014 Mar 30
• Correspondent Steve Kroft
• More +
• Stumble
• Twitter 1.1K
• Facebook 3.2K
• Comments 89

The following script is from "Rigged" which aired on March 30, 2014. Steve Kroft is the correspondent. Draggan Mihailovich, producer.

This month marks the fifth anniversary of the current bull market on Wall Street, making it one of the longest and strongest in history. Yet U.S. stock ownership is at a record low and less than half of Americans trust banks and financial services. And in the last two weeks, the New York attorney general and the Commodities Futures Trading Commission in Washington have both launched investigations into high-frequency computerized stock trading that now controls more than half the market. The probes were announced just ahead of a much anticipated book on the subject by best-selling author Michael Lewis called "Flash Boys." In it, Lewis argues that the stock market is now rigged to benefit a group of insiders that have made tens of billions of dollars exploiting computerized trading. The story is told through an unlikely cast of characters who figured out what was going on and have devised a plan to correct it. It could have a huge impact on Wall Street. Tonight, Michael Lewis talks about it for the first time.
Steve Kroft: What's the headline here?
Michael Lewis: Stock market's rigged. The United States stock market, the most iconic market in global capitalism is rigged.

60 Minutes Overtime Lewis explains how the stock market is rigged


Steve Kroft: By whom? Michael Lewis: By a combination of these stock exchanges, the big Wall Street banks and high-frequency traders.
Steve Kroft: Who are the victims?
Michael Lewis: Everybody who has an investment in the stock market.
"Stock market's rigged. The United States stock market, the most iconic market in global capitalism is rigged."

Michael Lewis is not talking about the stock market that you see on television every day. That ceased to be the center of U.S. financial activity years ago, and exists today mostly as a photo op. This is the stock market that Lewis is talking about; the one where most of the trades take place now, inside hundreds of thousands of these black boxes located at more than 60 public and private exchanges, where billions of dollars in stock change hands every day with little or no public documentation. The trades are being made by thousands of robot computers, programmed to buy and sell every stock on the market at speeds 100 times faster than you can blink an eye. A system so complex, it's all but invisible.
Michael Lewis: If it wasn't complicated, it wouldn't be allowed to happen. The complexity disguises what is happening. If it's so complicated you can't understand it, then you can't question it.
Steve Kroft: And this is all being done by computers?
Michael Lewis: All being done by computers. It's too fast to be done by humans. Humans have been completely removed from the marketplace.
"Fast" is the operative word. Machines with secret programs are now trading stocks in tiny fractions of a second, way too fast to be seen or recorded on a stock ticker or computer screen. Faster than the market itself. High-frequency traders, big Wall Street firms and stock exchanges have spent billions to gain an advantage of a millisecond for themselves and their customers, just to get a peek at stock market prices and orders a flash before everyone else, along with the opportunity to act on it.
Michael Lewis: The insiders are able to move faster than you. They're able to see your order and play it against other orders in ways that you don't understand. They're able to front run your order.
Steve Kroft: What do you mean front run?

60 Minutes Overtime Lewis: Rigged stock market is "bigger than a scam"


Michael Lewis: Means they're able to identify your desire to, to buy shares in Microsoft and buy 'em in front of you and sell 'em back to you at a higher price. It all happens in infinitesimally small periods of time. There's speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But it''s enough for them to identify what you're gonna do and do it before you do it at your expense. Steve Kroft: So it drives the price up.
Michael Lewis: So it drives the price up, and in turn you pay a higher price.
"If it wasn't complicated, it wouldn't be allowed to happen. The complexity disguises what is happening. If it's so complicated you can't understand it, then you can't question it."

Michael Lewis is not the first person to allege the stock market is rigged or that high-frequency traders are front running the market but he was the first to find Brad Katsuyama, who is the first to figure out how it was being done.
Michael Lewis: A very unlikely character, a trader at the Royal Bank of Canada, a young Canadian man named Brad Katsuyama realized that the market that he thought he knew had changed. The market seemed to be willing to sell a stock. But the minute he went to buy it, someone else bought it, the stock went up. It was as if someone knew what he was doing before he did it.
RBC trading floor in New York City
WallStreetandTech.com
Back in 2008, Katsuyama was 30 years old and running the Royal Bank of Canada's stock desk in New York with 25 traders working for him. Every time one of them tried to buy a large block of stock for a client their order would only be partially filled and the price of the stock would go up. It kept happening over and over again. Brad Katsuyama: The best analogy I think is that your family wants to go to a concert. You go onto StubHub, there's four tickets all next to each other for 20 bucks each. You put in an order to buy four tickets, 20 bucks each and it says, "You've bought two tickets at 20 bucks each." And you go back and those same two seats that are sitting there have now gone up to $25.
Steve Kroft: What'd you think the problem was?
Brad Katsuyama: I had no idea. I couldn't get answers.
At first, Katsuyama thought the technology at RBC was slow, until he went to Stamford, Conn., and paid a visit to one of the largest hedge funds in the world.
Brad Katsuyama: The same thing that I was experiencing as a trader, one of the most sophisticated hedge funds in the world was also having the same problem. Then the light bulb goes off. You say, "Holy cow, this is, this is a huge problem."
Steve Kroft: You were determined to get to the bottom of it?
Brad Katsuyama: Yeah.
Steve Kroft: Why?
Brad Katsuyama: 'Cause it just didn't feel right. It didn't feel right that people who are investing on behalf of pension funds and retirement funds are getting bait and switched every single day in the market.
Katsuyama suspected that the problem had something to do with plumbing, the way the trades were routed through fiber optic cables from his trading desk in lower Manhattan to the 13 public exchanges in northern New Jersey. But no one would tell him exactly what happened to his orders once he hit the buy or sell button. So he put together a team of technical experts, traders and most importantly, an Irish telecom guy named Ronan Ryan, who was an expert on high-speed fiber optic networks.
Ronan Ryan: I knew nothing about trading until my first day at RBC when I sat in that three hour meeting on algorithms. I called my wife afterwards. And I'm like, "Holy crap, I have no idea what they just said."
Ryan had done work for the high-frequency traders. He knew what they were building and he knew about the colossal amounts of money they were prepared to spend. He told Brad about a company called Spread Networks that had laid a high-speed fiber optic cable from the futures market in Chicago to the exchanges in New Jersey. They spent $300 million just to shave three milliseconds off the fastest route and were leasing access to high-frequency traders at $10 million a pop.
Michael Lewis: From Brad Katsuyama's point of view, when he heard they were willing to spend that kind of money for milliseconds it told him the sums involved were vast. That was one of the first questions he said he had. He says, "All right, I'm getting ripped off. Everybody's getting ripped off. But what does it add up to?" And I think when he heard the story of Spread Networks, he realized this is tens of billions of dollars we're talking about.
Ronan Ryan also knew where all the cable was buried and had detailed maps of the fastest routes from the financial district in lower Manhattan to the various stock exchanges in New Jersey, all calculated down to the millisecond.
Ronan Ryan: So I would sit there, roll out maps, and roll out this data center as a box and a line going through it. And they had no idea what I was on about. And then I'd be like, "Hey are you guys aware of where these data centers are located? Of course you're arriving there at different time intervals."
For Brad, the maps turned what had been an abstract idea into something he could actually see. The first place his orders were landing was the BATS Exchange across the river in Weehawken, N.J., and high-frequency traders were lying there in wait.
Michael Lewis: Brad realizes, "Oh my God, that's how I'm being front-runned. I'm being front-runned because my signal gets to the BATS Exchange first and they can beat me to all the, all the other exchanges."
It only took a tiny fraction of a second for Brad's trade to reach the next exchanges on the network, but the high-speed traders were able to jump in front of him, buy the same stock and drive the price up before his order arrived, producing a small profit of just one or two pennies. But it was happening to everyone's trades millions of times a day.

60 Minutes Overtime How ordinary investors are getting "screwed"


Ronan Ryan: That adds up. Steve Kroft: You make it sound like a skim.
Ronan Ryan: What else would you call it?
Michael Lewis: One hedge fund manager said, "I was running a hedge fund that was $9 billion and that we figured that the, just our inability to, to make the trades the market said we should be able to make was costing us $300 million a year." That was $300 million a year in someone else's pocket.
Steve Kroft: Is this illegal?
Michael Lewis: No. That's the thing that's so shocking about all this. It should...
Steve Kroft: Well you used the word front running. Front running's illegal.
Michael Lewis: This form of front running is legal. It's legalized front running. It's crazy that it's legal for some people to get advance news on prices and what investors are doing. It's just nuts. Shouldn't happen.
Ronan knew the only way to beat the high-frequency traders was to take away their milliseconds advantage that allowed them to sniff out slower trades and beat them to the exchange. He had an idea how to do it.
Brad Katsuyama: And he said, "You're probably better off trying to go slower," which means send the order to the exchange located the farthest away first and send the order to the one that's located to you last. So stagger when you send them out with the goal of arriving at all places, as close to the same time as possible.
Katsuyama and his team developed software that did just that, allowing the orders of Royal Bank of Canada's customers to reach all of the exchanges at the same time, cutting the high-frequency traders out of the equation.
Brad Katsuyama: And essentially our fill rates went to 100 percent. We couldn't believe it when, when we actually figured it out.
Steve Kroft: So you beat speed by slowing it down.
Brad Katsuyama: Yeah, as crazy as that sounds.
Katsuyama and his team went out and began selling and explaining what they had discovered to the big mutual funds, pension funds and institutional investors, people who had suspicions that they were being front-run but didn't know how.
Steve Kroft: And nobody had really bothered or tried to figure this out until Brad Katsuyama came along...
Michael Lewis: It was in nobody's interest to, correct. I spoke to dozens of investors, big investors, famous investors who, who said that, "When Brad Katsuyama came into my office and laid out to me how the market was rigged, my jaw hit the floor. I mean, I knew something was wrong. I just didn't know what it was and no one had told us."
Brad Katsuyama: Part of those meetings led us to believe, "Holy cow, this is, this is really something." 'Cause some of the most sophisticated, largest asset managers in the world, this is the first time they were hearing this story.
And some of the most famous names in the American stock market heard the pitch...

60 Minutes Overtime Lewis: Investors, big and small, are "prey"


Michael Lewis: The Capital Group, T. Rowe Price, Fidelity, Vanguard, I mean, it, one after another. He was in their offices. They said, "This man walked in. Why is he gonna know how the stock market operates?" And, and at the end of the hour they said, "Oh, my God, he understands." Hedge fund titan David Einhorn of Greenlight Capital is one of the believers.
Steve Kroft: Was he able to show you how your orders were being front run?

David Einhorn: Oh yeah. They had, they, they got the marker and the white board and started drawing maps and boxes, and wires and locations. And yeah, we went through it in some detail.

Steve Kroft: Did you find it interesting?

David Einhorn: It was. It was.

Clients like Einhorn encouraged Brad and his team to do something bigger. That's when Katsuyama, a conformist even by Canadian standards, decided to do something radical. In 2012, he quit his high-paying job as head trader at RBC and went off with some of his team to start their own exchange.

Steve Kroft: You were making good money at Royal Bank of Canada?

Brad Katsuyama: Yeah, right.

Steve Kroft: Millions of dollars?

Brad Katsuyama:: Right. I guess, I guess everybody know that now? Right, yeah.

Steve Kroft: Why did you wanna go off and walk away from that job and start a stock exchange?

Brad Katsuyama: Yeah, wasn't an easy conversation to have with my wife, that's for sure. It almost felt like a sense of obligation to say, "We found a problem. It's, it's affecting millions and millions of people. People are blindly losing money they didn't even know they're entitled to. It's a hole in the bottom of the bucket.

They set out to build an exchange funded exclusively by large traditional investors. They called it IEX, the investor's exchange, and quietly launched it in October with the support of some of the biggest players on Wall Street. And it comes with built in speed bumps to eliminate the advantage of high-speed predators.

Michael Lewis: And the way they did it was they coiled 60 kilometers of fiber optic cable between themselves and the high-frequency traders computers. They call it the magic shoe box and it looks like it's got fishing line in it. But essentially, a high-frequency trader, if he tries to react on the IEX exchange, his trade goes (makes noise) for 60 kilometers until, so he's, he's in east Jesus.

Steve Kroft: So it gets there the same time as everybody else.

Michael Lewis: It gets there same time as everybody else's.

Steve Kroft: Do you think they can game you?

Ronan Ryan: I think that they'll try to game us. I think the fact, though, that we've gone and met with the majority of the biggest high-frequency firms to explain what the magic shoebox is doing and that people haven't said, "Oh that's rubbish. That won't work." We've had many ask us for a backdoor, to be honest. So that says something that it'll work.

The exchange is off to a strong start, although it is still very small with lots of powerful enemies that like the status quo and are trying to starve IEX by discouraging customers from using them. Greenlight Capital's David Einhorn is one of the investors.

Steve Kroft: Do you think IEX will survive?

David Einhorn: I think it's gonna succeed. I think it's gonna succeed in a very big way.

Just last week, IEX received a strong endorsement from Goldman Sachs, whose top executives cited it as a model for a more stable and less complicated stock market.

Brad Katsuyama: We're selling trust. We're selling transparency. And, and, and to think that trust is actually a differentiator in a service business, it's kind of a crazy thought, right?

Michael Lewis: Why is this kid, why is he able to all of a sudden sit at the center of the American stock market? And the answer is, when someone walks in the door who is actually trustworthy, he has enormous power. And this is the story, story of trying to restore trust to the financial markets.


© 2014 CBS Interactive Inc. All Rights Reserved.

• Steve Kroft Few journalists have achieved the impact and recognition that Steve Kroft's 60 Minutes work has generated for over two decades. Kroft delivered his first report for 60 Minutes in 1989.
  

http://www.cbsnews.com/news/is-the-us-stock-market-rigged/

High Frequency Trading Hits 60-Minutes Scrutiny; Trading or Skimming?



In the wake of a 60-Minutes report on High Frequency Trading, numerous people have sent dozens of links. Let's take a look at a few of them.

CBS Video



High-Speed Traders Rip Investors Off

Michael Lewis says High-Speed Traders Rip Investors Off.

The U.S. stock market is rigged when high-frequency traders with advanced computers make tens of billions of dollars by jumping in front of investors, according to author Michael Lewis, who spent the past year researching the topic for his new book “Flash Boys.”

“The United States stock market, the most iconic market in global capitalism, is rigged,” Lewis, whose books “Liar’s Poker” and “The Big Short” highlighted Wall Street excesses, said during the interview. The new book comes out today. “It’s crazy that it’s legal for some people to get advance news on prices and what investors are doing,” he said.

The author’s comments follow New York Attorney General Eric Schneiderman’s decision to investigate privileges marketed to professional traders that allow them to place their computers within feet of exchanges and buy access to faster data streams. Officials at the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission have also said market rules may need to be examined.

Dominating Volume

High-frequency traders account for about half of share volume in the U.S., a statistic that shows their pervasiveness and hints at the obstacles faced by proposals to rein them in. Exchanges rely on HFTs for profits as well as liquidity, with electronic market makers all but eliminating the old system of human floor traders who oversaw the buying and selling of equities. While critics such as Lewis see a Wall Street plot, proponents say the new system is faster and cheaper.

One of the heroes of Lewis’s book is Brad Katsuyama, who left Royal Bank of Canada in 2012 to form a new market, IEX Group Inc., along with other former traders from the Toronto-based bank. David Einhorn’s Greenlight Capital Inc. hedge fund invested in the platform, which started trading in October and was established to minimize the influence of predatory strategies, Goldman Sachs Group Inc. has endorsed IEX and is the venue’s biggest broker.
Ticket Prices

IEX was established partly to address concern that technology advances and fragmentation have made the $22 trillion U.S. equity market too fast and opaque. The platform, a dark pool with ambitions to officially become an exchange, imposes a delay of 350 microseconds, or 350 millionths of a second, on orders -- enough to curb the fastest trading firms. IEX aims for greater transparency by making its trading rules available for public review, unlike some other electronic venues.

Eric Ryan, a spokesman for the New York Stock Exchange, and Nasdaq OMX Group Inc.’s Rob Madden declined to comment on Lewis.

“We completely disagree with allegations that the U.S. equity market is rigged,” Bats President Bill O’Brien said in an e-mail. “While we should never stop trying to improve our market structure, it is unfair and irresponsible to accuse people simply because they use technology and enhance competition. This has helped make our market the most competitive and liquid in the world, greatly benefiting individual investors.”

New York’s Schneiderman is examining the sale of products and services that offer faster access to data and richer information on trades than is normally available to the public. Wall Street banks and rapid-fire trading firms pay for these services, providing millions of dollars in quarterly sales to exchanges and helping ensure their markets are supplied with standing orders to buy and sell stocks.

Bloomberg LP, the parent of Bloomberg News, provides its clients with access to some proprietary exchange feeds.

The investigation threatens to disrupt a model that market regulators have permitted for years as high-speed trading and concerns about its influence have grown. Trading firms pay to place their systems in the same data centers as the exchanges, a practice known as co-location that lets them directly plug in their companies’ servers and shave millionths of a second off transactions.

SEC Commissioner Daniel Gallagher said on March 28 that individuals are concerned that high-frequency traders detract from fairness in the marketplace.

“The problem with high-frequency trading right now is that there’s a perception that for the little guy, the markets aren’t fair,” Gallagher told CNBC during an interview. “That perception to me is a reality. It’s something we need to address.”

Video Playlist

NY Attorney General: Market Race for Speed Inherently Dangerous

Synopsis: New York Attorney General Eric Schneiderman discusses his investigation into high-frequency trading and why he believes the SEC needs to revisit regulation on Bloomberg Television’s “Market Makers.”

PennTrade CEO: High Frequency Trading Isn't Rigged

Synopsis: Steve Ehrlich, chief executive officer of PennTrade and former CEO at Lightspeed Financial, talks about high-frequency trading. Ehrlich speaks with Scarlet Fu and Tom Keene on Bloomberg Television's "Surveillance." Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia, also speaks.

Co-Founder of Themis Trading: High-Frequency Trading Neither Good or Bad

Synopsis: Sal Arnuk, co-founder of Themis Trading, talks about high-frequency trading and industry regulation. Arnuk speaks with Stephanie Ruhle and Erik Schatzker on Bloomberg Television's "Market Makers."

Schneiderman, Levitt, Roach: High Frequency Trading

Synopsis: New York State Attorney General Eric Schneiderman, former Securities and Exchange Commissioner Arthur Levitt, and Stephen Roach, a senior fellow at Yale University and former non-executive chairman for Morgan Stanley in Asia, speak about high-frequency trading. Steve Ehrlich, chief executive officer of PennTrade and former CEO at Lightspeed Financial, and Sal Arnuk, co-founder of Themis Trading, also comment.

HFT Crackdown

On May 18, Forbes reported NY AG's New Crackdown Targets High-Frequency Trading

High-frequency trading remains in the spotlight as New York’s Attorney General announced a new crackdown on vendors in the business.

NY AG Eric Schneiderman announced he will take a deeper look at high-frequency trading world, particularly vendors that provide services for HFT traders.

He called for reforms that he says would eliminate “unfair advantages” that high-frequency trading firms have over other investors. Those advantages are offered by exchanges and other service providers and include: allowing traders to locate their computer servers within trading venues themselves; providing extra network bandwidth to high-frequency traders; and attaching ultra-fast connection cables and special high-speed switches to their servers, the AG’s office said.

Last year, after probing from the AG’s office, Thomson Reuters agreed to discontinue its practice of selling high-frequency traders a two-second sneak peek at certain market-moving consumer survey results.

“I am committed to cracking down on fundamentally unfair – and potentially illegal – arrangements that give elite groups of traders early access to market-moving information at the expense of the rest of the market,” Schneiderman said in a statement.

Trading or Skimming?

Finally, please consider Speed Trading in a Rigged Market a Bloomberg column today by Barry Ritholtz.

On "60 Minutes" last 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 own favor. The only surprising thing about Lewis’s assertion was that anyone could be even remotely surprised by it.

The math on trading is simple: It is a zero-sum game. One trader’s gain is another trader’s 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’s take -- the “skim” -- comes out of these large institution’s trade executions.

Several years ago, the founder of Tradebot, one of the biggest high-frequency firms, had said that the firm had “not had a losing day of trading in four years.” The firm’s average holding period for stocks is 11 seconds.

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.

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 proof that something is amiss.

It is interesting to note that the rigging theme is consistent with everyone who looks closely at this subject. My colleague Josh Brown notes that markets haven't become rigged, they have always been rigged. What is different is the ability of high-frequency traders to see other people’s 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.

I am looking forward to reading "Flash Boys." I hope our members of Congress and the folks at the SEC do so too.

Flash Boys

Lewis is a good writer, I too will pick up a copy of "Flash Boys", sure to be a best-seller.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Read more at http://globaleconomicanalysis.blogsp...zed5RtfAV5v.99

April 1, 2014

April Fools?

Hugh de Payns

Big banks busted (again) for currency fraud. A recent posting on Seeking Alpha:

Investors sue a dozen banks for currency manipulation

Tuesday, April 1, 4:43 AM ET | BAC, BCS, C, CS, DB, GS, HSBC, JPM, MS, RBS
A group of investors from across the U.S. and Caribbean have filed a class-action lawsuit against 12 banks for allegedly colluding to manipulate currency rates.\
The firms being sued include Bank of America (BAC), Barclays (BCS), Citigroup (C), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), HSBC (HSBC), JPMorgan (JPM), Morgan Stanley (MS) and RBS (RBS).
The investors include city and state pension plans such as the City of Philadelphia and the State-Boston Retirement System.
The suit adds to multiple investigations by international authorities into forex manipulation, the latest being the Hong Kong Monetary Authority.

Gee, who knew?
Well, maybe just about everyone.
So, tell me, where are the handcuffs? If there is enough evidence for pension funds, including public pensions, to sue, where is the line of states attorney generals filing criminal charges? Clearly there must be sufficient evidence to pursue a criminal case.
Well, just like the...

LIBOR scandal
Precious metals manipulations
MF Global
High frequency trading

Nothing will happen. Or maybe a fine amounting to just a fraction of the illicit profits garnered by these institutions.
We are all truly in trouble when investors have to sue to recover money while regulatory agencies and law enforcement sit on the sidelines.
Perhaps if the Obama administration were told these institutions were run by the Tea Party, something would get done. At least the IRS would be all over this.

http://www.americanthinker.com/blog/...m_medium=email

y... View this email in your browser

April 1, 2014 Santiago, Chile In an absolutely astounding announcement today, Janet Yellen made a stern and heartfelt apology for 100 years of asset bubbles, depressions, recessions, panics, banking crises, and all-around inflation caused by the Federal Reserve. Flanked on both sides by former Fed Chairmen Ben Bernanke, Alan Greenspan, and Paul Volker, Ms. Yellen stated emotionally, "As grand wizards of the financial system, we must accept full responsibility for the consequences that our decisions have had on the lives of ordinary people around the world..." "Frankly," Ms. Yellen continued, "I can't believe in this day and age that total control of the money supply is awarded to a tiny handful of unelected central bankers. It is a most undemocratic system and should be abolished immediately." Well... a man can certainly dream. Happy April Fool's Day. Simon Black