SEC Chair On HFT: 'The Markets Are Not Rigged' 303
Hugh Pickens DOT Com writes "Reuters reports that U.S. Securities and Exchange Commission Chair Mary Jo White told a U.S. House of Representatives panel that she flatly rejected claims that retail investors are being fleeced by high-frequency traders who can use their speed to jump ahead with buy and sell orders that fetch better prices. 'The markets are not rigged,' says White. 'The U.S. markets are the strongest and most reliable in the world.' White's comments to the House Financial Services Committee mark the first time she has directly responded to allegations in Michael Lewis' new book Flash Boys: A Wall Street Revolt. The book alleges that high-speed traders are engaged in a form of front-running, in which the firms are able to quickly identify an investor's desire to buy a stock, rush to buy it first and then sell it back at a higher price. The SEC has been reviewing equity market structure issues, particularly following the May 6, 2010 flash crash incident when the Dow Jones Industrial Average sharply plunged before quickly rebounding. Although staff at SEC are considering whether to launch some pilot studies to test different regulatory proposals, there are no immediate plans to issue rules to crack down on high-speed trading or trading in unlit markets. 'I want to be very clear that the market metrics suggest that the retail investor is very well-served by the current market structure.'"
Re:Retail doesn't even have SEC Protection (Score:4, Interesting)
She has a point – a weak one but still a point. I have read the book and it seems to me that the system is not gammed for small retail orders – those are harder to front run. And even if the HFT trades scalp a penny or three per share that is still better than the $.125 spread 20 years ago. Not saying that the system can’t be improved – Flash Boys did change my mind on that – but let’s realize the magnitude and who it affects.
High Frequency Theft ... (Score:5, Interesting)
I'm largely of the opinion that HFT is a chance for the banks and trading houses to skim off the top of the stock market, at the expense of the 'normal' investors, and using information and access we couldn't possibly have.
I don't believe at all that the "retail investor is very well-served by the current market structure". In fact, I believe the retail investor gets fleeced by these trading programs.
And since there are several well known examples, including the one in the summary, in which these trading programs themselves distort the market and significantly changes the valuations of the stocks.
HFT is the large trading houses using the money of investors (their own and everyone else in the market) like a Vegas casino slot machine.
Basically, HFT is vigorish [wikipedia.org].
Tax based on holding period (Score:5, Interesting)
Simply tax profits on all equities held for less than 5 minutes at 100%. Problem solved.
Re:Not a surprise (Score:5, Interesting)
The cute part is that she thinks she can get away with it. She's not screwing over your average American household, she's screwing over investors who have money and power.
Re:Front running (Score:5, Interesting)
don't think the concept of front running is an obscure concept that is up for debate.
Front running 30 years ago was a simple concept. These days concept is really blurring. From wikipedia
"Front running is the illegal practice of a stockbroker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers"
Please note - 'its' customers. HFT are often 'front running' somebody else customers. They don't know the orders up-front - they observe market and block/execute on other markets fractionally faster.
I'm not saying it is morally valid - just challenging the statement that 'front running' is a clear concept.
So how fast does real world value change? (Score:5, Interesting)
When put this way, the only events that qualify are explosions and lightning. Even an earthquake takes seconds to minutes to "change value". Tornadoes take minutes and hurricanes take hours or days.
HFT is totally removed from real world phenomena. It is a completely fictional construct. Is it any surprise that it is used to fleece the suckers? It has no legitimate purpose because it is not a real world measure of anything.
Re:Fucking Casuals. (Score:5, Interesting)
Someone did a study on this and proved it. I think the study showed that if the bid/ask is $1.00/$1.01 and you offer $1.01, all of a sudden the bid ask goes to $1.01/$1.02.
I've seen this myself. Just watching the stock price go up a penny every time I put an order in. The study showed that HFT can step in before my order is filled and get the transaction that I wanted.
This is what these "smart" people get paid for. It's total BS and not "American"
HFT as 'insider trading'. (Score:4, Interesting)
The whole concept of 'insider trading' is that you're using knowledge that wasn't yet available to others.
If someone told you, 'hey, we're going to sell in 5 minutes at $100/share', and you went and bought it all up so they had to buy it at a slightly higher price ... wouldn't that be trading on information before it became public knowledge?
Now, it might not be 'insider', as you're not within the company whose stock is being sold ... and they're legally allowed to release the information ... but there are so many other laws regarding stock sales (eg, 'tender offers', where a company plans to buy back shares at a higher price, and they have to leave it open for a given amount of time), that I'd be willing to argue that it *should* be illegal, even if only to improve 'investor confidence'.
(ie, why would you trade in the stock market when you're getting scammed every time you do?)
Re:Not a surprise (Score:3, Interesting)
> Is it illegal to run to the next stalls, buying all the oranges and then offering them back to the slow moving guy?
In financial markets, that is expressly illegal. That activity actually has its own set of laws because it is such an unfair, pernicious, and profitable activity.
The issue with HFT is that the wording of the laws make it legal for a _computer_ to do it, as long as there isn't a human telling the computer what to do _for each individual operation_. It is legal to have a computer program for "when i can frontrun, buy", despite it being illegal for a human to do "when i can frontrun, buy," and it also being illegal for a human to manually tell a computer "you can frontrun!" and having the computer execute the trade.
HFT does in fact make the system worse. It is not the first time anyone thought of the scam, but it is a scam that has been intentionally made illegal and is currently legal by technicality only.