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NY Times Article: High-Frequency Trading Picking Your Pockets

|Includes: Goldman Sachs Group Inc. (GS)

Despite the recent crash in the financial system, banks like Goldman Sachs are making juicy profits. One reason for the profits is that large banks are using high-frequency trading to pick the pockets of the average investor.

Thursday's NY Times article documents the scandalous practice of High-frequency Trading. The full article is here. Showing how the hedge funds and large banks are picking the pickets of ordinary investors, columnist Charles Duhigg writes:

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices. ....

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

Being able to to look at how others are trading is akin to being able to peek at another player's cards in poker. High-speed computers fluster ordinary traders into giving up profits, as the NY Times article continues:

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

The profits add up, according to the article "High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates"

Just another example of Wall Street picking the pockets of ordinary investors. After being bailed out with TARP, this is how they are repaying the taxpayer's kindness.


Full Disclosure: Author holds no position in any commodity derivative or in any fund mentioned in this article. This article is for informational purposes only and is not meant to be construed as an invitation to invest with any specific strategy or to buy or sell any securities. You should perform your own due diligence and consult with a professional before investing.