Tag Archives: high frequency trading

High Frequency Trading, Just a Reminder

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high frequency tradingSeldom are the real reasons for things discussed in the media or anywhere else. The damage to the economy, done by high frequency trading firms is never discussed in the media or in academic circles.

Here are the facts.

It is not the speed of high frequency trading firms that puts investors at a disadvantage. Their speed is a function of these firms competing with one another. The faster a firm trades the more efficient it is in exploiting the unsuspecting behavior of the public, hedge funds, investors and traders of all kinds.

The only true advantages these firms have is that they are not bound by the constraints of existing securities laws. What we have is the equivalent of making robbery legal for an anointed set of citizens. That happens also, but folks are not aware of it.

No one has stated outright the high frequency trading firms are above the law. They don’t have to. Regulators simply fail to notice. Individual investors are sometimes prosecuted for spoofing. For high frequency trading firms spoofing is a constant trading technique from the open to close of trading.

High frequency trading firms and lawmakers have compatible goals so manipulation is overlooked as long as the result is higher stock prices. This puts all other traders at a disadvantage because they lose all objective criteria for studying price movements. Both fundamental and technical analysis become useless with respect to decision making.

The disadvantage to equity buyers and sellers is obvious. The general public suffers even more but for reasons that are not automatically grasped. Biggest of all are the changes in the incentives that govern the actions of the upper 1%. When all one has to do to get paid is run up the price of owned assets without respect of profits, the rich become lazy. Innovation and effort by the wealthy become highly subdued. Welfare for the rich has the same effect on the rich as it does on the poor. It reduces the incentive to do anything productive.

I mention these things today because we are on the cusp of an era where everyone together will suffer greatly as a result of years of abusing the financial markets. It is important that blame be correctly placed because someone will be blamed regardless.

Can Traders Adapt?

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The bison is near extinct as a species because a new predator moved into its living space. The bison herds had no way to adapt fast enough to avoid near extinction.
Ordinary securities traders are, as a result of high frequency traders, in the same shape the bison herds were in when the white man started killing them off. I am including hedge funds and anyone else who trades and doesn’t hold securities long term.
High frequency traders may or may not be profitable themselves but cause losses to others by distorting the market in ways that have nothing to do with supply and demand.
High frequency traders have several advantages in their operations. Firstly they are above the law in every sense of the word. They do not have to obey laws that regular traders are subject to. Their persuasive powers are enormous. They have the vast majority believing their activities are innocuous and no effect on securities prices.
Traders could adapt and the high frequency would have no advantage at all. So, why do traders fail to adapt? Mostly, they are stupid. The time honored sacrament of placing stops is a guarantee of losing money, especially where short sales are concerned. A trader is short, so he covers immediately when the short goes against him. Good money management you say? High frequency trading algorithms game the time honored technical analysis dogma. There is no money to be made trading this way in the current area.
The answer for the individual is to lengthen the time frame he trades in, and to trade without stops. It is generally considered un-trader like to holler foul. Never mind the stigma of being called a wimp. Besides, nothing needs to be said.
One time a professional poker player said, he just doesn’t play in a game if the thinks someone is cheating. He finds another game. He knows there is no way to win if other player can manipulate the outcome of the game. Change games by working in a different time frame and lose the now outdated technical analysis dogma.
I am short a portfolio of stocks because I think a big play is coming to the downside. I could be wrong and if I am I will get the loss I deserve. But, I do have a chance to make a profit as does a bull who takes the opposite side. There is no point in using an approach that makes gains impossible by virtue of serving a food for a predator.

Heaven To The Mob

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Heaven to the mob is a legal way to steal money. The mob has found its heaven in Wall Street and high frequency trading. Did I say legal? Legal and illegal are actually the same when nobody minds. What is being done now actually is illegal and it will result in the destruction of U.S. financial markets faster than you are likely to realize. The cost to you will be very high, perhaps everything you own and all of your income. Heaven to the mob will turn out to be hell for the rest of us.
The unwinding of high frequency trading and working through the damage done due to our allowing years of corruption in our financial markets will turn out be the defining issue of your lifetime.
The Securities Acts of 1933 and 1934 makes it illegal to place orders without having the intention of making a transaction. High frequency trading is based on this very practice.
The logic of allowing this illegal theft to continue is simple. The belief is that enforcing securities laws against folks so powerful would put more stress on the economy than the system will tolerate.

High Frequency Trading

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In most of life, human relationships for example, I believe it makes good sense to get the facts clear and accurate before accusing anyone of anything. If I had a suspicion that a neighbor had stolen my lawn mower I wouldn’t dream of making an accusation without evidence.
Where the stock market is concerned a different set of standards apply. Jumping to conclusions is not only rational but necessary. Correctly making up ones mind with only bits and pieces of information, hunches and suspiciouns is a valuable skill. Innocent until proven guilty is great for the U.S. legal system but doesn’t apply nor is it required for figuring out what is going on in the financial arena.
My take on this is that high frequency traders engage in intentional theft. Their righteous dialog is deception plain and simple. Why do i think these things? They have no reason not to. They exist and operate at high levels where law does not apply.
Operaters in the financial market are cut out of the same mold as regular organized crime figures. Some if not most of the big money on Wall Street is one and the as the money that controls illegal drugs. Legal ways to steel money physically safe likely more profitable than illegal activities.
I am assuming things work like this because there is no reason why they wouldn’t. I am as certain of this as I am that mold will grow on moist bread that I leave on a dish.
High frequency trading exists as a way to steal your money, mine and everyone else’s. In the end it destroy the market just like too many fleas and ticks will kill a dog. As for the operators destroying the world’s capital market, they would rather not kill their cash cow but if it happens, so be it. Their profit has been made.