The Machines are in Control on Wall Street

Michael Lewis’s new book “Flash Boys” has exposed high frequency trader networks that jump ahead of stock orders from investors and make tiny profits on hundreds of thousands of trades throughout a routine day on Wall Street.

Those tiny trades, executed much more quickly than a blink of an eye, add up. Lewis estimates this “invisible tax” on the stock market comes to nearly $160 million a day, according to a recent New York Sunday Times adaptation of the book titled “The Wolf Hunters of Wall Street.”

High frequency trading smells a lot like “front running.” That’s the old Wall Street practice of trading a large block of stock with advance knowledge of another trade that will influence the price of the stock up or down. By trading ahead of or in front of that party, the “front runner” makes a profit and harms the other party.  The Securities and Exchange Commission forbids the practice of “front running.”

Wall Street is known for its abundance of absurdities, but what makes high frequency trading particularly galling is that, because it is done by machines and not people, it is currently legal under SEC rules.

Speed is the key to gaming the system on the new Wall Street, according to Lewis. “The trouble with the stock market – with all of the public and private exchanges – was that they were fantastically gameable, and had been gamed: first by clever guys in small shops, and then by prop traders who moved inside the big Wall Street banks,” Lewis writes.

Wall Street banks showed a complete lack of ethics in bundling bad mortgages and selling them as Triple A paper before the credit crisis. The same moral malaise is in evidence from flash trading.

“The deep problem with the system was a kind of moral inertia,” Lewis writes. “So long as it serves the narrow self-interests of everyone inside it, no one on the inside would ever seek to change it, no matter how corrupt or sinister it became – though even to use words like “corrupt” and “sinister” made serious people uncomfortable.”

Lewis concludes by connecting the subprime mortgage crisis to high speed trading. And it’s not a stretch. “The same system that once gave us subprime-mortgage collateralized debt obligations no investor could possibly truly understand now gave us stock-market trades involving fractions of a penny that occurred at unsafe speeds using order types that no investor could possibly truly understand.”

It seems that the machines are in control on Wall Street. Are investors powerless to stop this computerized, flash fleecing by a thousand cuts per second?

Watch out speedsters, the Feds are investigating these traders for insider trading.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.

About Jacob H. Zamansky 57 Articles

Jacob (”Jake”) H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.

Mr. Zamansky was at the forefront of recent efforts to “clean up” Wall Street. In 2001, he successfully sued former Merrill Lynch analyst Henry Blodget on behalf of a New York pediatrician misled by Blodget’s stock research. The case’s successful resolution was the catalyst for New York Attorney General Elliot Spitzer to investigate the conflicts of interest on Wall Street and resulted in the well-reported $1.4 billion Global Settlement, which included many of the biggest names on Wall Street.

More recently, Mr. Zamansky is one of the leading litigators and opinion leaders of the subprime mortgage crisis and the related hedge fund collapses, representing both investors and mortgage borrowers who were defrauded by Wall Street firms and mortgage lenders. Among Mr. Zamansky’s early actions is filing the first arbitration case on behalf of institutional and high net worth investors against Bear Stearns Asset Management with regard to the two hedge funds which collapsed as a result of exposure to subprime mortgage backed securities. He also has filed claims on behalf of individual investors victimized by brokers that steered their portfolios into unsuitable subprime stocks and mortgage borrowers who were fraudulently coerced into inappropriate mortgage and investment transactions.

Earlier in his career, Mr. Zamansky worked for more than 30 years as a litigator, including positions at Skadden Arps, Slate, Meagher and Flom LLP. His tenure also included serving as a federal prosecutor with the Federal Trade Commission.

A native of Philadelphia, Mr. Zamansky has been a frequent expert commentator on CNBC, CNN, and FOX News and has published opinion pieces in The Wall Street Journal, Financial Times and USA Today. He is regularly quoted and his cases have been chronicled in major financial and news publications including The New York Times, USA Today, The Washington Post, BusinessWeek, Fortune and Forbes. He is a frequent lecturer for industry and legal groups around the country. He also writes a blog that can be viewed here.

Visit: Zamansky & Associates

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