I am not here to rain on the parade, but I do think developments overnight have the potential to dramatically change the nature of our markets if not our economy. I am referring to issues surrounding high frequency program trading.
Until now, the debate over high frequency trading has largely been relegated to Wall Street periodicals, financial news outlets, and blogs, including Sense on Cents.
Well, this morning America awakens to see this high frequency debate course across the front page of The New York Times, Traders Profit With Computers Set at High Speed:
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.
It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.
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.
These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.
Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.
This article is likely sweeping the globe at this very minute and, in my opinion, is particularly devastating in its tone and delivery . . . and justifiably so.
I can only imagine the commentary this evening at the local Rotary Club, Knights of Columbus, Lions Club, town carnivals, and church fairs. Probably something along these lines:
“Have you heard how Wall Street is screwing us?”
“I knew that game was never on the up and up.”
“What a bunch of thieves.”
Without entering into a debate over the merits or lack thereof of this high frequency program trading, I think Wall Street has a huge problem on its hands. Why? A question of fundamental fairness. With the publication and dissemination of this article, try to explain to the average Joe looking to buy 50 shares of IBM how he is being treated equitably.
As the New York Times reports:
“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.” (emphasis added)