News & Analysis
SEC Hopes to Trim Computer Investing?
SEC Probes Rapid Trading ... Federal securities regulators are examining whether some sophisticated, rapid-fire trading firms have used their close links to computerized stock exchanges to gain an unfair advantage over other investors, people familiar with the matter say. The wide-ranging probe, being handled by the enforcement staff of the Securities and Exchange Commission, is focusing on the computer-driven trading platforms of exchanges, including BATS Global Markets Inc., the people said. The SEC probe illustrates a bigger push by regulators to examine less-transparent parts of the securities markets, such as the fast-growing area of so-called high-frequency trading. High- speed trading firms use powerful computer systems for rapid-fire trades, in which they often hold stocks for only fractions of seconds. They benefit by being able to move quicker than less technologically proficient investors. – Wall Street Journal
Dominant Social Theme: These crooks using computers are making it impossible for honest people to earn a living in the stock market.
Free-Market Analysis: As predicted in these modest pages, the US Securities and Exchange Commission is now taking aim at computers and trading. The proximate cause of the probe is the so-called Flash Crash in May 2010, when stocks fell hard and rose rapidly without an identifiable cause.
Some, especially in the alternative media, have speculated the Flash Crash was a warning sent by top traders on Wall Street to the US government. There have been other narratives floated as well.
The SEC has ALREADY investigated the Flash Crash itself and concluded in a 104-page report that a US$4 billion sale of stock index futures was the trigger for the sudden downturn. The seller was widely reported to have been Waddell & Reed, and the speed of the sell order supposedly aggravated market volatility considerably.
Is it surprising that the SEC should be revisiting the Flash Crash and using it as a springboard for a larger investigation of computerized trading? Those running the regulatory authority itself don't think so. They claim to be worried that fast-moving computerized trading gives top trading shops an unfair advantage over "other investors" – see article excerpt above.
The only trouble with this line of reasoning is that it posits a criterion that can never be fulfilled. It is impossible to make securities markets "fair" for all investors. And the idea that regulators can make them so is no more logical.
But with plenty of funding and teams of legal employees available to them, the top honchos apparently find further investigations of computerized trading irresistible. Here's some more from the article:
The SEC is examining, among other things, whether high-frequency firms benefit from delays in the dissemination of prices from various corners of the markets, according to a person familiar with the matter. High-speed firms use direct feeds from exchanges that can give them a leg up on slower traders, critics say. While most investors rely on feeds that consolidate prices throughout the market, high- frequency traders can access prices a split second faster through their access to direct feeds, experts say.
They do so through a practice known as "collocation," in which they place their trading computers in the same data center that houses the exchange's computer servers. The SEC also is examining fees that exchanges pay out to draw-in high-speed trading orders, according to the people familiar with the matter.
Firms that send orders to exchanges that help complete a trade are paid a small rebate, typically about 30 cents per hundred shares. Some high-frequency firms specialize in such trading, commonly known as rebate trading, which requires extremely fast connections to exchanges to achieve success and consistency.
Boiling this down is not hard. Several top trading boutiques have apparently found ways to gather securities prices more quickly than they are available to the general public. Traders at these shops can then purchase given securities at a lower price, knowing they will be able to sell them for slightly higher ones. Exchanges are willing to pay a fee to do business with these high-speed firms.
No doubt, the SEC will eventually issue "rules" that will reduce this "abusive" practice. But at this point the SEC and other financial regulators are like children sticking their hands in the dike.
Short of shutting down securities trading entirely and returning to fully physical, face-to-race trading, there is little regulators can do to realistically "level the playing field" between the "little guy" and the banking giants using computer power to gain advantages.
Some of the really sophisticated market manipulations are likely a combination of volume and computer trading. In even a moderately traded market various securities tend to trade in certain patterns. By anticipating those patterns, disrupting them and then re-buying the same instruments, one can effectively "front run" the market.
Such practices are rife and historical in nature as well. When the New York Stock Market wanted to merge with the Uptown Boys in the 1800s, NYSE honchos promised the Uptown Boys they could specialize in certain lucrative stock franchises. Thus the specialist system was born.
Top stock men and regulators have also perpetuated the idea that "market makers" are needed to "stabilize" and regularize securities prices. These market makers may be empowered by law to see more buy and sell orders than others – providing these individuals with a kind of regulatory mandated front-running.
Of course, these days there is plenty of speculation over Washington DC's so-called plunge protection team. This group, formed after the stock market crash of 1987, is still said to exist and regularly manipulates markets, especially the larger stock market, to ensure "price stability."
In truth, all securities markets must be penetrated by various kinds of market manipulation and corruption. These days, advantages accrue naturally to those with the most capital and the most computer power. This is surely an irresistible combination that likely guarantees success over time.
The SEC in particular is struggling desperately to stem the public perception that securities markets provide more benefits to the rich and powerful than to the average investor. The last time this perception was widespread, especially in the US, was in the 1930s and 1940s.
It took a world war and a subsequent 20-year campaign by the NYSE to woo investors back into the stock market. By the 1960s, stock markets were surging again. But the twin crashes of 2000 and 2007/8 have reignited in the body politic a healthy skepticism of securities trading and organized equity investing.
The great families of the power elite that control central banks around the world are determined to fight back against this skepticism. The artificial economy, so dependent on inflated paper dollars – monetary fiat – needs public acceptance for its continued existence.
The idea, then, is to ensure people participate in the equity markets, especially, so as to provide credibility for the larger economic system. Those who are making money, or feel they have the opportunity to make money, in various securities markets are less likely to be especially critical of the larger system.
It is a kind of elite sub dominant social theme, that stock markets in particular ought to be looked upon as fair and offering any investor, large or small, an equal chance at becoming a millionaire or more.
Yet surely the general public is more disenchanted with the current economic and investing system now than at any time since the 1940s. We believe that what we call the Internet Reformation – and a growing understanding of the Way the World Really Works – is contributing to this sentiment.
People are increasingly distrustful of various forms of organized authority and various mainstream nostrums when it comes to health and wealth. The stakes are very high for the powers-that-be, and this is one reason that the SEC continues to promote its high-profile investigations.
A major reason for the SEC's regulatory exercise is to illustrate clearly to the buying public that the markets are being properly supervised and investigated and that people have nothing to fear from participating.
Conclusion: In fact, a combination of mathematical acuity, computer power and large-scale trading volume has created a growing disparity between big and small investors that will only increase over time.
Posted by Dilence Sogwood on 03/26/12 12:59 PM
Per the "Flashcrash" - it was a good time to sell if you look back.
It wasn't an anomoly.
However, the SEC going back and cancelling real trades was the crime.
Posted by Dilence Sogwood on 03/26/12 12:54 PM
Wait, DB you never provided any evidence for manipulation of corruption as a result of high frequency traders.
Next time you get to see a level II quote screen, take a look: any name you want to trade has 100 share liquidity one penny wide. That's because high frequency guys are committing capital. You can buy OR sell. Where's the manipulation in that?
What the regulators HAVE done is limit the trading that can take place after a large stock move. This negatively affects small investors who are nimble and would have the ability to liquidate/increase positions. The very large funds never have the liquidity to react to fast moving news. They prefer no one gets to transact on new information.
Posted by cmcaples on 03/24/12 02:30 PM
Is this as good as it gets?
I recently read an article, which painted a dim picture of the United States middle class. Over the last decade or so the gap between rich and poor has grown so much the US now ranks alongside some third world countries and behind the old Soviet satellite blocks. More to the point, middle class wages since the seventies have barely increased while the top 1% has seen theirs quadruple.
I only bring this up, because there's a belief we are given more opportunity here, and for that opportunity we are asked to put up with a lot of BS from the powers that be. We are asked to look the other way when 10% of us commit suicide. We're told it's necessary to incarcerate 6 million people, and be happy that 30% of us take psych drugs. We work an average of 40+ hours a week and give at least 50% of our pay away in taxes. Our food is picked raw, shipped from thousands of miles away and pumped full of chemicals. We are mired in bureaucratic fees and processes that provides benefits to only a small percentage of us. Only 2 % of us own our homes outright, are infrastructure is falling apart, traffic is rampant, and in almost every industry only 3-4 companies control 98% of the market share-everywhere you turn, life seems to be in a state of decline.
It begs the question, is this is good as it gets? Is this the shinning city on a hill Regan once described, or a florescent lit Wal-Mart? Was life really meant to be lived packed in polluted cities, compelled to spend most of our day light hours toiling in servitude to provide for our most basic needs?
I've been asking myself these questions lately, and I really don't like the answers. I think a small group of people has created a world of materialism that has completely removed us from the natural world. They tell us success is 'bigness', they tell us centralization of authority it the key to prosperity. Is this the American dream?
HELL NO! The American dream is the absence of centralization, it's an agrarian society built on 'smallness'. Small communities working in tandem trading with one another, fostering bonds that transcend race, socioeconomic status or who you sleep with.
I think we need to rekindle our imagination and discover again what's possible. We need to take back our lives from the Combine of Regulatory Democracy. Reaffirm the value of being human and most of all fight back! It's easier than you may think.
Next time you get a ticket plead not guilty. Shop local even if it's a little more expensive. Attend city council meetings and encourage them to pass legislation that nullifies laws like the patriot act. Turn off your faux realty TV and discuss current events with your family. Read alternative news publications to get a different point of view. Push back when a government stooge asks you to do something. Exercise the power we all possess, and remind the government that we'd rather die on our feet than live on our knees.
Reply from The Daily Bell
This is very good!
Posted by seer on 03/23/12 09:04 PM
"In fact, a combination of mathematical acuity, computer power and large-scale trading volume has created a growing disparity between big and small investors that will only increase over time."
We hope not. Since the top 1% have reaped most of the growth the last 11-12 years and since they tend to put their excess money in investments, it is no wonder the markets are inflated. Hedge Funds with their billions are able to use computers to throw their weight around, ironically not always to their advantage.
"Emmanuel Saez, an economist from UC Berkeley, tried to quantify that oppression. He found that during the first year of the recovery from the 2008 crisis 93 per cent of incomes gains went to the 1 per cent. "Top 1 per cent incomes grew by 11.6 per cent, while bottom 99 per cent incomes grew only by 0.2 per cent," he said in an update of a previous study. "... Such an uneven recovery can help explain the recent public demonstrations against inequality."
Moreover, income for the 99 per cent grew by 20 per cent from 1993-2000, but during the Bush years, it grew by only 6.8 per cent. It's worth saying again that this is not a natural occurrence of the free and open marketplace. The upward redistribution of wealth is the concrete result of politics and policy - one might even say socialism for the rich, capitalism for everyone else.
Or should I say authoritarianism for everyone else. Since the terrorist attacks of 2001, the US has spent about $635bn to militarise the country's local police forces. It's ostensibly an effort to better prepare communities in case of another attack. But, as Stephan Salisbury reportedrecently, there has been a cultural transformation, too. "The truth is that virtually the entire apparatus of government has been mobilised and militarised right down to the university campus." When the state makes a fetish of security, as the US has, it becomes hard to tell the difference between acts of civil disobedience and terrorism."
Reply from The Daily Bell
Wow Seer another comment we agree with. Scary.
Posted by nithsdale on 03/23/12 04:43 PM
Your article was summed in your final statement.
Of course the SEC is worried about investor confidence. The whole trading world... .commodities, production, mercantilism is dependent upon the realization of "value" and some "savings" for re-energizing the system when things do not go well. Governments have built their use to the governed on the premise that they can deliver services bought and paid for with part of those savings and if investments prove to be illusionary, not there, governments and trade collapse.
We live in our modern world because the people involved in keeping the system are vigilant re abuses that threaten it. Not only do they try to re-inforce the status quo, when all things are working smoothly, but they try to soften our conflicts that might lead to worse effects, like all out wars, revolutions since those not only cause imbalances but can bring the whole trading conference and confidence to a crashing end, as we have seen too many times in last century alone!
Free markets are as adversely affected by these upheavals as planned markets so both must work together to insure the whole continues for both sectors good. No one says the system is perfect but until renovations occur to address problems we must work wth what we have. Tearing down, abandonning any forethought, co-operation is no answer, and trying to opt out, exile oneself to another land is a fool's action!
We either hang together or hang separately! We are in a mess and the elites are not to blame... the incredibly rising demands of people, who are not in the trading and marketing system that provides everything, is the beast in the room. Their appetites have been satisfied for so long that thy thing they are entitled to it all without one cent of investment, either in work or ideas! I am alive therefore I should have!
Good Luck with your anarcho thesis! Anarchists have never built anything but a hut for themselves and never will.
Posted by Abu Aardvark on 03/23/12 04:30 PM
'Even More Evidence of a China Hard Landing'
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Posted by Abu Aardvark on 03/23/12 03:58 PM
'Caution: Do not read this without having a bucket nearby.'
Howdy, Hoss! How about a bathtub?
'U.N. Policy Paper Outlines 7 Building Blocks for 'Heavy-Handed' World Government'
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'GUIDELINES FOR ACCESS, RETENTION, USE, AND DISSEMINATION BY THE NATIONAL COUNTERTERRORISM CENTER AND OTHER AGENCIES OF INFORMATION IN DATASETS CONTAINING NON-TERRORISM INFORMATION'
Click to view link
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Posted by Hoss on 03/23/12 02:54 PM
OK, back on point.
ANOTHER example today;
Click to view link
Posted by Hoss on 03/23/12 02:27 PM
Yes, and everyone acted surprised when the administration admitted that they aren't concerned with keeping energy prices down. (Smuggled concept alert: government isn't supposed to be price-fixing anyway!) They've been preaching since the beginning that only outrageous energy costs will allow their negative-efficiency 'alternative energy' to compete.
Which was wrong, too, because they calculated their cost of 'alternative energy' based on being able to produce solar cells and windmills with ... . cheap, abundant energy. Raise the input cost of energy, and they still lose out. As they must. Because they are inefficient, thermodynamically.
Posted by Bluebird on 03/23/12 01:51 PM
Interesting, Hoss. A few years back when many still bought the global warming nonsense, I would go to a major university science center website ( I don't like to name names, but you can probably figure it out) and read their articles. The little brains would pump out paper after paper stating that gas prices need to go at least $7. pg, maybe $10. to get people to stay home. No, I did not believe from day one, but wanted to know what was being schemed.
Every summer and major holiday where people are likely to take their families vacationing, gas prices soar. So families stay close to home while the instigators jet across the world for their vacations. Folks would do well to remember that while sitting home this summer and hearing the jokers in office blame one another for the false reasons for it.
Posted by rossbcan on 03/23/12 01:37 PM
The problem is: who's definition of "OK"?
From some perspectives (those pointing OUR guns of state, at US, making a killing on "private profit, socialized loss"), everything is A-OK (for now).
Time for Hercules (reality, public reaction to survival threats, inevitable consequence to predatory actions) to "clean the stables".
OWS, and the "decreed entitled" (pawns whom were mis-educated to stupidity and irresponsibility, assuming THEIR actions / inactions do not have personal consequences, for them and that facing consequences (ie; reality) is "unfair") are poised to make sure that the productive (once again, always) "pay the cost", as opposed to the real perps, those whom have rationalized away the "rule of law" with the consequence of destroying civilization:
Click to view link
Posted by Mountainview on 03/23/12 01:16 PM
The word "investing" isn't appropriate in this context. High speed trading or configuration based trading is betting on the technological advantage of your technology over all the others. It's more like card counting in the casino or formula 1 racing. Investment has to do with the evaluation of the objective value of the stock or bond you buy.
Posted by Hoss on 03/23/12 12:59 PM
P.S. The article is a bald-faced admission that the prime mission is a psyops one, to promote the dominant social theme on an unheard-of scale.
I thought the Elves would get a kick out of that one.
Posted by Hoss on 03/23/12 12:56 PM
Apologies to The Bell, this is off-topic because the last Greenie story was a few days ago.
Caution: Do not read this without having a bucket nearby.
Click to view link
Posted by kenn on 03/23/12 12:06 PM
The SEC. Another captured regulatory agency that is trying to appear as if they're doing something,,, inbetween checking out the latest porn features...
Posted by Hoss on 03/23/12 08:43 AM
Even with a tax incentive (401K) which turns people who would never venture into the market into 'ordinary buy-and-hold investors', people are beginning to wake up to the fact that the whole system exists to milk the ordinary investor. If that tax incentive were removed tomorrow, it would be game over for the whole edifice.
As it is, the stock market functions more than anything else as a mustache for the bogus money system / potemkin economy.
Zerohedge has been posting example after example of evidence showing how microsecond trading wiggles the market and allows traders to collect a daily arbitrage. Every once in awhile a program goes rogue (oops), and flash-crashes or booms one stock or another. Heck, all you have to do is look at how the bailed-out pseudobanks made record profits following the crash to see the fix. They consistently made their money in 'market operations'. Who else can do that? Most likely, this is what the latest smokescreen is there to cover. They don't want the 'average investor' (definition: poor sucker who got talked into payroll deduction to a 401K for retirement) to wake up and quit the market.
Volumes are down, prices are up, they've admitted that government and the banksters that own it intervene in the market with printed money to keep prices up for PR purposes, and HFT algorithms churn the market daily and scrape off a free arbitrage. That spells 'no thanks' for me.
I could be all wrong on this. Maybe the best plan for retirement is to put your earnings into a remotely-managed account that is a jobs program for some mutual fund manager, where you need the permission of government to get your hands on your earnings. Maybe the thing to do is to trust that everything will work out OK.
Posted by vivek on 03/23/12 08:38 AM
When time has been firmly equated to money, of course this is the natural con-sequence, no surprise.
A logical extension of that, and this is something you can make analogous to in so many of life's transactions... money = arbitrage.
The PTB want to control it FULLY. It's always the problem Reaction Solution game, that leaves proles just a little more prolier.
Time, the faster we dug into it, we got this medium, we got Atomic weaponry and we got computerized trading.
All three are blowing up as we speak.
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Posted by Abu Aardvark on 03/23/12 08:31 AM
Sorry for being off-topic again, but this could be a (THE?) big one:
'China is Crashing'
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Since I don't believe Obama will - consciously at least - start an all out war against Iran, I was wondering just why the heck he signed this chilling executive order:
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An anticipated, devastating crash and/or subsequent coup in China might be ONE reason for it.