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 

May 'Flash Crash': Blame the Computer!

While the effort of the regulator in telling the story about the infamous May 2010 stock market 'flash crash' has to be applauded, it leaves the reader with no clear message about what is being done to prevent a similar debacle taking place in the future. The amount of selling unleashed by the presumed perpetrator - Waddell & Reed Financial, courtesy Barclays Capital - is not particularly large given the stupendous amounts of money managed today's 'fiduciaries' on behalf of the investing public. $4.1 billion can easily be mustered by literally hundreds of players - especially given the amount of leverage that is available in the derivative markets. So while we may accept that the flash crash was simply due to inept trading execution we are left with a sneaking suspicion that other 'investors' with a more ruthless killing instinct may just set off the next crash on purpose in order to cash in during the ensuing panic. A similar mechanism was at work in the 2007-2009 credit crunch when speculators drove down the indices in the derivative market for mortgage and asset-backed securities. This created a 'death spiral' in the market for these assets which contributed to the near-collapse of the global banking system. Ironically, 'investors' who were prominent in that game and in some cases made billions out of this dislocation are still feted as heroes by the financial markets and assorted cheerleaders in the financial media.
(01/10/2010)

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)

Individuals think markets are not fair

The 'flash crash' experienced by the US stock market on May 6 further damaged the confidence of individual investors in the integrity of the markets for equities (Wall Street Journal, August 24, 2010). The lack of disclosure about the way that 'dark pools' and high-frequency trading operate has to be ended if there can be any chance of restoring a level-playing field where individuals again commit themselves to investing in equities. (25/08/2010)

How to regulate High-Frequency Trading - part 2

After last week's 'fat-finger-accident' a full investigation into the methods of HFT is required more urgently than ever. This should comprise full public disclosure of complete transaction records so that independent outside analysis would be possible. This would help to find answers to two questions in particular: (1) is the high-frequency trading fair to all market participants (2) who profits from it? As some major firms guard the secrets of their algorithmic trading (Goldman Sachs for example persecutes a former employee who it accuses of taking proprietary information about algorithms) there is a suspicion that things are skewed against the wider investing public - why else would someone try to keep information secret?

A quote from Barron's Magazine may shed further light on this problem: "our market structure has evolved to cater to masters of expensive technology, deployed unfettered by participants whose only concern is to squeeze out every last picosecond and fractional cent." (Sal Arnuk and Joe Saluzzi of Themis Trading).

Shorts, Lehman and Price Discovery

An article in the Wall Street Journal makes the point that short sellers help price discovery and cites the example of David Einhorn's (correct) criticism of Lehman Brothers in Spring 2008.
But what does this article prove? That the world should thank Einhorn for helping to precipitate the collapse of Lehman Brothers? If the short sellers have such a big heart they should just state their concerns and hope that management or the other shareholders - who are the ultimate controllers of a company - act upon the advice. That is at least what one would expect a responsible owner to do. One look at the share register of most listed companies makes it clear that most companies are effectively controlled by the same small circle of large institutional investors (BlackRock, Fidelity etal) and in a rational world it should not be beyond the power of the highly-qualified and well-paid professionals among their staff to be responsible guardians of the investor's interest. These firms are the ultimate force behind nearly all of corporate America (and by extension the World) and they can no longer hide behind arcane regulations or passing the buck to the governments.

How to regulate High-Frequency Trading

An interesting article in Barron's highlights the problems surrounding 'High-Frequencey Trading' (HFT). Pro-Gov has for a long time called for a public discussion of this practice. Is it distorting the level-playing field to the disadvantage of ordinary investors? Somewhere the supposed profits that are generated by HFT must come from and we assume it is not just a technological zero-sum game for the market participants that engage in this practice

SEC to eliminate flash order exemption

We have filed the following comment with the SEC.

'It is essential that the following feature is present in any market place: all orders, of any size have to be executed according to clear rules with respect to 'priority' and 'precedence'. The execution trail has to be verifiable after the trade in case there is any dispute as to the accordance with these rules. Publication of transactions has to be as near to 'real time' as is technically feasible. There should be no exception (neither to market makers, semiprofessionals or large investors)'.

A more lenghty comment (no surprise there) has been submitted by Goldman Sachs and can be found here.