1) High Frequency Trading Programs account for 70% of market volume
High Frequency Trading Programs (HFTP) collect a ¼ of a penny rebate for every transaction they make. They’re not interested in making a gains from a trade, just collecting the rebate.
Let’s say an institutional investor has put in an order to buy 15,000 shares of XYZ company between $10.00 and $10.07. The institution’s buy program is designed to make this order without pushing up the stock price, so it buys the shares in chunks of 100 or so (often it also advertises to the index how many shares are left in the order).
First it buys 100 shares at $10.00. That order clears, so the program buys another 200 shares at $10.01. That clears, so the program buys another 500 shares at $10.03. At this point an HFTP will have recognized that an institutional investor is putting in a large staggered order.
The HFTP then begins front-running the institutional investor. So the HFTP puts in an order for 100 shares at $10.04. The broker who was selling shares to the institutional investor would obviously rather sell at a higher price (even if it’s just a penny). So the broker sells his shares to the HFTP at $10.04. The HFTP then turns around and sells its shares to the institutional investor for $10.04 (which was the institution’s next price anyway).
In this way, the trading program makes ½ a penny (one ¼ for buying from the broker and another ¼ for selling to the institution) AND makes the institutional trader pay a penny more on the shares.
And this kind of nonsense now comprises 70% OF ALL MARKET TRANSACTIONS. Put another way, the market is now no longer moving based on REAL orders, it’s moving based on a bunch of HFTPs gaming each other and REAL orders to earn fractions of a penny.
Software performing arbitrage. Who would have guessed?
Thanks for that, great compact explanation of a rather complicated topic 🙂
Why can’t our beloved Congress outlaw this? Oh that’s right, they are owned by Wall Street banks. My bad. Time to dump my 401(k) into cash while its still worth something.
And nothing will be done about it because we say so. Get used to it, we have more fun for the lower classes incoming. Be sure and catch Shark Week on the Discovery channel for a clue.
#3 Why can’t Congress outlaw this? Are you f*cking insane? All this bullshit about how corporations are hurting me comes from that group of Sol Olensky communists that occupy the Whitehouse.
If Congress gave a tinker’s g*d damn about my money, they’d cut my taxes and let me keep it.
You can opt out of Wall Street by putting your money somewhere else. You can fight those evil corporations by not doing business with them. None of us can opt out of the financial disaster being manufactured by Barack Obama.
I think that an October crash is a pretty safe bet given how fragile this economy is. Remember, Obama doesn’t care about the stock market. So, the Obama supports also should care if their 401K value drops (another) 20-30% right?
Riddle me this then. ( please note I have no idea on the inner workings on the stock market, and am glad to not have any money invested there ) Would it not be wiser for the Institutional investor to simply buy outright all 15k shares at the $10.00 a piece? is buying in increments a better way to up the price for the new owner? The fact that the company alone would want to say “ok halfway through the purchase the price went up since you bought so many” seems very unlikely / underhanded. In fact if that were the case I woudl simply reply “I am buying 15k shares at $10.00 a piece; the current value. take it or leave it.”
IF that is the case then I want to say the next time I buy a car “Ok when I drive off the lot I am losing $4k because it will be considered USED and I should not have to pay for that”
So place a ‘limit’ order instead of a ‘market’ order.
With a ‘limit’ order, you define the maximum price that you are willing to pay. Typically it is placed at or below the current bid price.
With a ‘market’ order, you pay whatever they want to charge you per share. Only fools place market orders.
And never ever invest using one of the ‘big’ full service brokerage houses. They gouge you on their fees, and they trade internally with your money before you. Say you want to place a ‘limit’ order of $1/share, and it is trading at 95 cents. The full service guys buy it at 95 cents for themselves, and then resell it to you for the $1 +plus huge fees. Smaller brokerages don’t do that (for the most part). When I switched from a full service brokerage to Schwab, my trades started executing at below the limit price quite often, something I never saw under the full service system.
Schemes like the one described in the article only really affect accounts where the trading is in the millions of dollars per event, and the holding time is in seconds…. for small investors the news cycle is so far behind (minutes is waaay old news), and the costs are so high even at $8 per trade that the half-penny that is being talked about is really irrelevant.
Read the whole article and then tell me we don’t need regulations to control the whole financial sector.
There will always be those who only want “their tax money”, 40 acres, a mule, and lots of ammo. If these Neanderthals stayed on their 40 acres it wouldn’t be so bad. Instead we see them here blathering about how the “commie Whitehouse” is taking their money.
This is a great article but I wish it were a tad clearer. The opening paragraph says, “High Frequency Trading Programs (HFTP) collect a 1/4 of a penny rebate for every transaction they make. They’re not interested in making a gains from a trade, just collecting the rebate.”
Does anyone know where this rebate money is coming from?
First he implies this is bad, then he says the market would collapse if you take away this trading. No proof of the latter point either. In fact he says this loss of trading will cause a meltdown a few sentences after saying that you get this lower volume around Christmastime.
Shit, I’d like to have the 40 acres and a mule. the other I already have.
but, based on the way the government is screwing everyone it will only be a few more years until we can no longer afford to live here due to the high real estate taxes eating us alive.
awake is making good sense. Putting on limit orders on any purchase is also good advice.
As for item #5, that is more worrisome than anything else in the article. The number reported is grossly inflated but it is still large – the problem is that it’s impossible to evaluate the worth of derivatives. However most of them will just quietly expire.
This one is squarely Bush’s fault – he set a precedent during his eight years of absentee management for an SEC that’s so effective in keeping crooks from pulling scams they’re practically an accomplice.
#10, yes I suspect this example isn’t quite right. Perhaps there is an institutional fee collected to handle the exchange, and they give you rebates for doing these trades.
# 15. MikeN, I still don’t understand. Max Keiser claims that Goldman Sachs is making $100 million per day through its high frequency trading program but it’s not clear to me who is losing so much money every day. How can anyone make so much money daily without someone else giving up that much money daily?
but but but… didn’t the Republicans say that if we get rid of that Burdensome Government Regulation and let those nice Wall Street men do whatever they want, prosperity would inevitably follow?
[sarcasm off]
Why anyone listens to Republicans after this, I have no clue. Creative liars, I guess.
I don’t understand what the hubbub is about. No one is forcing the buyer to pay the inflated price. They choose to, or they can choose not to.
If someone else can come in and buy it for less and sell it for more, then it just demonstrates that the property was being sold for less than it was worth. The party being ripped off is the seller who didn’t get full price for their asset.
This is the same as the concert ticket market. People get all upset when brokers buy tickets and sell them for more money. They wouldn’t do it is there wasn’t a demand for them. And the party getting screwed is the artists and venue who don’t get 100% of the revenue that the ticket holder paid. If they were smart, the artists/venue would sell the tickets for more.
I wonder when stocks will be the value of a business, BASED on the amount of Business the company WISHES to sell/trade.
The more stocks OUT on the market the lower the price. As no one wants LOWER prices, 1 person wants all the shares.
AS the WORTH of the company goes up, the Value of the stocks goes up. Which may not be what the company wants. So the divide the business, and make a competitor or Secondary company.
Quite a bit of FUD. He also (as noted in the comments) doesn’t attribute his sources or drill into any of it.
As a consequence, while I won’t completely discount his conclusions I take them with a large grain of salt.
The Exchange has draconian power. It can stop time. It can arbitrarily remove trading authority. It can suspend listing. It can make life very unpleasant for someone who tries to fool with it. And it learns, from it’s mistakes.
I wonder how liquid the markets would be without the high frequency trading?
Wow. A bunch of crap. But, the point that we’re all getting robbed and that the market may well be set up for a pullback isn’t crazy.
First, the 70% figure for volume doesn’t seem to be real. Estimates I see are under 50% (which is, to be fair, still high).
We get robbed on transactional costs. If you use a limit order, you pay no more than you agree to pay, and you pay the transactional fee that your broker charges. Period.
The HFTP makes is money (especially when it, as in the example BUY and SELLS at the same price) from rebates from the exchange. So, it’s the exchange that pays them. We pay the exchange solely through our trading costs. We all know what they are… maybe they could be lower, but maybe lower costs would come with larger bid-ask spreads… I don’t know. But if I don’t like the transactional cost, I’m free not to trade. So… meh.
As for the “making the institutional investor pay a penny more”… OK, so in that example if there are no other “asks” at 10.03, that’s true. But so is the flipside — they’re GIVING the institutional buyer a penny more on the sell-side. As long as they’re not buying at one price and selling at another, it’s market neutral (apart from the influence on transactional costs, which I can’t dispute) HFTPS can only operate between the bid-ask spread, and limit orders can be used to deal with that.
There are some shennanigans being played with automated programs with advance information (knowing that there are more orders on the sell or buy side and quick execution to take advantage, etc), and that should be found and stomped out – but I don’t think that it really affected most average investors (read: non day-traders) to any significant degree.
Can I ask a Strange question..?
Im going to ask, anyway..so shut up.
WHAT ARE STOCKS FOR??
I can see stocks for beginning companies.
I can see stocks for commodities..(which is what it was FOR, in the FIRST PLACE)..
But all I see is companies using STOCKS as there power to do R&D and advancement..INSTED of their OWN MONEY, from profits.
Larger corps and LONG old companies should be using THEIR OWN MONEY..They should have bought back ALL the stocks LONG AGO..
Stocks are being used as LONG TERM LOANS..
Thats not what they WERE/ARE FOR..
We’re all gonna die…
#8–Awake==”When I switched from a full service brokerage to Schwab, my trades started executing at below the limit price quite often, something I never saw under the full service system.” /// Beauty!! Reminds me of “full service” at a whore house. I believe it is that last kick to the head when you are in the mud in the alley without clothes on and your wallet in the Madames Safe.
So, isn’t the stock market with all its faults still “the best investment one can make over time?”===hahdhahahahahahahahahaha/
Yep, probably still is. Crumbs from the table.
Speaking of whore houses, I still love Elliot Spitzer. He appears quite regularly on Morning Meeting on MSNBC. Dylan also doing a bang up job of explaining the current mess–simplistic, but some good info here and there.
I wish USA wasn’t so f*cked up that dedicated real men like this have to pretend to be eunuchs to satisfy their bitch constituency.
I think this is dangerous, for those that don’t get it, because it takes the “free” out of “free market.” Stock prices are supposed to be based on collective stupidity, which under many circumstances is actually pretty good.
If a large percentage of trades have nothing to do with valuation of what’s traded, the computers are mostly looking for time advantage on other peoples trades, there is too much noise in the system. Securities could, and probably are, become increasingly unhinged from a fair valuation.
Day to day this would cause a small slippage, but over time it could build up quite seriously. When the markets return to fundamentals the damage might be severe.
Computers are fast and accurate but entirely dumb. There are enough sucker investors, excited day traders, and corrupt bankers out there blowing bubbles. Is it a good idea create a feedback loop using these machines?
Automated market makers? That is a good idea. For profit “liquidity providers” is a bad idea. There is an important distinction.
I dont think it’s just arbitrage. There’s something going on with exploitation of a loophole in being able to see other peoples orders and canceling orders before they go through. I think they need to get that fixed so the playing field is level.
now days, investing is a Random number the Corp makes up.
WE need more money! Raise our Stock price 1 penny, and watch everyone jump on it..
YES!! NOw we can tell the bank we are worth “THIS MUCH”.
Its not worth it..The OLD TIME companies should NOT be valued on the volatility of STOCK, and should be OUT of the market, to keep things STABLE. Take small parts of profit and invest it BACK into the company to invent NEW/better goods and products.