Juggling Dynamite

“An insider of the secretive world of high-frequency trading is set to attack that industry Thursday on Capitol Hill, giving lawmakers a potential road map to address practices that critics say can put ordinary investors at a disadvantage and the financial system at risk.

Since rapid-fire trading firms now provide many of the buy and sell orders that support the market, investors are at the mercy of automated systems that can run amok during volatile times, according to Dave Lauer, who last year quit his job as a trader for an elite Chicago high-frequency trading outfit.” See more at: High-Speed Trading in the spotlight

WSJ’s Michael Siconolfi explains how high-frequency traders undercut everyday stock traders and unfairly jump ahead in the line for order fulfillment.  Here is a direct link.

“High-frequency trading, which already has a sullied reputation, is even worse than the critics have charged, a new survey shows.

The Federal Reserve of Chicago recently asked 30 firms associated with the industry — traders, exchanges, vendors and others — to evaluate where HFT stands in the wake of a series of high-profile blowups.

While the central bank’s analysts knew there were issues, what they found exceeded their expectations.

Industry pros reported a rash of out-of-control computer algorithms that power the HFT platforms. They admitted that speed is more important than safety. And they even went so far as to say that they actually wish the industry was more regulated but want the rules to be applied equally, something that may not be happening today.

“Market participants at every level of the trade life cycle reported they are looking to regulators to establish best practices in risk management and to monitor compliance with those practices,” Carol Clark, senior policy specialist at the Chicago Fed, wrote in a summary of the survey’s findings.”

See: Congress shines spotlight on speed trading.

Meanwhile the ones who have a vested interest in continuing HFT, are the firms who are using it to speculate with unfair technical advantages and physical proximity to the exchanges, and they are of course, the same firms with deep lobbying tentacles in Congress. Not to mention the securities exchanges, who are collecting profits off the reckless trading as legitimate investors increasingly withdraw. As we were reminded in the 1932-1934 Pecora hearings, stock exchanges looking for profits are notoriously bad at policing reckless trading, to wit:

“During the speculative orgy of 1928-1929, stock exchanges made no adequate effort to curb activities on their exchanges. On the contrary they conceived it as no part of their function to discourage excessive speculation or to warn the public that security values were unduly inflated.” –p. 81, Senate banking and currency report, June 1934

HFT is clearly a scam practice that heightens risk and undermines legitimate uses for public markets. Time for Congress to quash it. Sen. Jack Reed, (D-RI), weighs in on what he expects to discuss at this morning’s Senate hearing. Here is a direct link.

Tom Friedman of The New York Times was on Charlie Rose last night discussing his recent trip to China and developments in the Middle East. Here is a direct link.