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Collateral Damage

Author's Note: In my last installment I briefly discussed High-Frequency Trading, Flash Trading and Dark Pools. This article is similar to that posting, but, expounds on the subject with additional facts. If the material sounds similar, it is, but because I feel so strongly about it, I am including it just the same. Consider this an addendum or Part 2.

If you have a job and skim from the cash register or emergency slush fund, you'd get fired and even prosecuted. Do the same crime in a country with more Draconian laws, the authorities cut off your hands. A similar offense if you are a wiseguy in the mafia and they'll whack you. I just don't understand why the high-frequency trading technique known as Flash Trading isn't under more scrutiny by the powers that be because the firms that engage in the practice are just skimming off the top and playing with an advantage, like throwing a spit ball or using steroids if you're a baseball player. They're nothing but shakedown artists in my humble opinion and should be regulated, if not eliminated.

During the past year Flash Trading got a black-eye from Main Street because they were purported to be the cause of the Flash Crash in May of 2010. This is an urban myth. According to Graham Bowley in his recent New York Times article "The New Speed of Money, Reshaping Markets": "In their investigation into the plunge, the S.E.C. and Commodity Futures Trading Commission found that the drop was precipitated not by a rogue high-frequency firm, but by the sale of a single $4.1 billion block of E-Mini Standard & Poor’s 500 futures contracts on the Chicago Mercantile Exchange by a mutual fund company.". I just wanted to clear the air, but I still believe that even though Flash Trading wasn't a direct cause of the Flash Crash, it can make the markets unstable and this is not good for anybody except the anointed few that control the financial grid.

Flash Trading is is a sub-set of High-Frequency Trading and, if you believe that the stock market is primarily comprised of floor brokers on the New York Stock Exchange, you are misinformed. In an article on 1/4/11 by John Melloy, producer of CNBC's Fast Money, he writes: "High frequency trading accounts for 70 percent of market volume on a daily basis, according to several traders' estimates. The average holding period for U.S. stocks is now just 2.8 months, according to the Crosscurrents newsletter. In the 1980's, it was two years.". The article also goes on to talk about dark liquidity: "Another factor jumped into the fray in December: dark pools. Off-exchange trading accounted for more than a third of the trading volume in December, says Raymond James.".

You don't have to be a Rhodes Scholar or a member of MENSA to do a little back of the envelope calculating and come up with a rough estimate of half of all High-Frequency Trading is done via Dark Pools. I don't have facts and figures on this, but I imagine that some Dark Pools also are in the business of Flash Trading. Many of the masters of the universe on Wall Street use every trick in the book to make their meal ticket. They have to to remain king on the hill. The Mom and Pop investor isn't an endangered species, but being a buy and hold investor isn't what it used to be.