Are stock exchanges offering fair play?

A small order I placed in an ETF on the London Stock Exchange today showed that even for small orders the markets offer an uneven playing field for the unwary. The second my order had been entered there appeared an offer that was just placed 1 pence inside my limit order. Given that the spread in this 'liquid' ETF was a quite wide 1 per cent between bid and offer there was obviously room for the 'market maker' to offer an improved price compared to my order. While the behaviour of the dealer can certainly no be called front running it still leaves the question why he has not put the better price on the system in the first place. Having my order behind his offered price gives him the opportunity to cover any sale made at his new price by 'lifting' my offer. Given the proliferation of competing dealing platforms also makes it difficult - if not impossible - for the retail investor to be sure that no transaction takes place at the limit price (or above it) which should have included the limit order.
(08/02/2011)

No effective Inquiry into high speed trading

While a former Goldman Sachs employee is exposed to the full force of the law after having been accused of stealing high speed trading secrets that generated millions of dollars in profits for the investment bank we are kept waiting for a full and public inquiry into the way these codes affect the public market in securities. I fear we will have to wait a (very) long time, be it in the US or elsewhere.

12/12/2010 

U.S. seeks to shield Goldman Sachs Secrets

"Federal prosecutors in Manhattan this week asked a federal district judge to seal the courtroom at the forthcoming trial of a former Goldman computer programmer accused of stealing the firm's computer code. The trial is set to start in late November." (Wall Street Journal, 27 Oct 2010)

Pro Gov continues to argue that the trading process in listed securities markets cannot be allowed to be dominated by secretive algorithms that are suspected to skim off profits at the expense of public order flow - be it from retail or institutional investors. The NYSE for example used have - and still has - very open rules about 'priority and predence' in relation to the execution of orders. In the age of computers it should also be possible to ensure that clear rules are adhered to - even if orderflow is measured in nanoseconds.
28/10/2010 

High-Frequency Trader fined in US

FINRA sanctions Trillium Brokerage Services, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading Strategy. This is probably only the tip of an iceberg and investors will not be able to have confidence in the workings of securities markets until high-frequency trading is properly supervised and regulated.
13/10/2010 

Whose Gold coins do high-frequency traders pick up?

With respect to the benefits of shaving three milliseconds from the time an order reaches the market, Ben van Vliet, a professor at the Illinois Institute of Technology, has the following to say (Forbes Magazine, 27 Sept 2010): "Three milliseconds are close to an eternity in automated trading, this is all about picking gold coins up off the floor--only the fastest person is going to get the coins." If a statement like this is not a wake-up call to the regulators all over the world the individual investor (who ultimately is the owner of every penny invested in the financial markets even though the majority is managed for him by all sort of fiduciaries) has no chance to get fair treatment in the investment game. (17/09/2010)

High-Frequencey or High-Priviledge Trading?

In the (distant?) past exchanges had clear-cut rules about how orders were treated. The New York Stock Exchange for example had clear rules defined with respect to priority and precedence that insured that orders large and small had a level-playing field. The present discussion (Wall St Journal, 13 Oct 09) about unfair advantages gained by giving priority access to so-called high-frequency traders makes it clear that these rules have to be adjusted in light of the technological advances we have seen in the past few decades. Now time intervals are measured in milli or nano seconds but technology also gives the tools the regulate high-speed trading orders. What is intolerable is the fact that certain market participants can claim faster access than is available to other market participants. It is high time that the arms race to ever-faster access speeds gets regulated by the authorities. The exchanges are no longer non-profit making institutions that have the interests of the wider investment public at heart and if necessary have to be told to put traffic humps in order to slow down order flow from certain market participants.