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Post a Comment On: Doug Ross @ Journal

"Crony Capitalism -- Statistical Evidence that the Government and the Investment Banks Have Rigged the Stock Market"

5 Comments -

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Blogger robot said...

Linked at the Robot.
Your 401k Are Belong To Us
http://mindnumbedrobot.com/archives/366

11:07 PM

Anonymous student aid said...

Great posting thanks

2:43 AM

Anonymous Phil said...

I shared this post with a conservative friend who's also an options trader. He replied as follows:

... I have been reading extensively about this since the computer-driven melt-down and melt-up last Thurs ... The way I understand it, what Goldman and Morgan are doing is not technically considered "insider" trading since insider trading is defined as having inside knowledge of what something like an earnings report are going to be prior to public release. These firms might also be doing this, but no one has been able to prove that. The charges are rather about HFT, high-frequency-trading. The exchanges the blog are attacking will say they are making order knowledge public in order to promote customers getting the best price. That is, after all, the purpose of an exchange. Market makers of stocks may hold public orders back until they find a price where they can make money on price arbitrage but the exchanges are supposedly not allowed to do this.

If, as the article says, the orders are being made public before others have a chance, that's one thing. The controversy as I understand it about HFT is that the orders are NOT always made public but the super computers the large firms are using can discover price and volume of orders faster than others. Here is how it works:

I put in an order to buy 100,000 shares of Google at up to $508.50/share but let's assume that this order is not revealed to the market. Still, the order is sitting there on my server.

Goldman's supercomputer puts out an order to sell 100 shares at $508.25 (current market price as of this writing) and my server eats it.
Goldman's computer says, "Gee, that was easy" and puts in another order to sell another 100 shares at $508.26 and my server again takes it.
Then Goldman's computer tries $508.27 and is successful again.
Goldman's computer keeps firing out orders to sell 100 shares incrementally higher until it tries $508.51 and my server does not accept it. So now, Goldman knows my order is at $508.50 and starts firing off sell orders continually until the remainder of my 100,000 share order is filled. Goldman knows that it can buy these shares at the current market of $508.25 and make the spread of $0.25 per share which might not seem like a lot, but x 100,000, that's $25,000 and their computers are doing this for hundreds or thousands of stocks all day. And remember this all occurs in a fraction of a second, which makes it nice work if you can get it :) The only thing Goldman has to worry about is if Morgan's computers which are trying to do the same thing are able to do the trade faster. This is why these companies are spending so much money on progamming whizzes and the fastest IT resources they can get.

This is a technology cold war on whose computers are fastest. One millisecond can make all the difference. This is why companies like Goldman must locate their computing power right AT the exchange in NY and the exchange leases server space for this purpose. They also pay $3,500/mo. for data which is a lot for us, but nothing for them. The reason is that to locate a trading server even 100 miles from Wall St. means 1-2 milliseconds of delay due to simply the speed of light and data transfer, resistance of wires, etc. That can mean the difference between them scooping trades or someone else scooping them. Congress is reluctant to try to stop this because, technically, there is nothing illegal about what they are doing, but they do have a clear advantage over retail customers.

We can never compete with HFT, but we can still make money in longer-term (in this case, >1 second) trading.

===
I look forward to reading any feedback to this.

1:24 PM

Blogger fboness said...

Every long term is made up of a series of short terms. If the HFT computers win every short term then they win the aggregate long term as well.

2:48 PM

Anonymous portable media player said...

Goldman team is still taking orders to sell 100 shares higher and higher until he is $ 508.51 and my server does not accept. So far, Goldman knows my order is $ 508.50 and begins to withdraw from sales orders constantly until the rest of my part in 100,000 is met. Goldman know you can buy these shares on the market today for $ 508.25 and make the
portable media player

3:47 AM

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