High speed computers, unfair rules hurt stock investors

New York Stock Exchange, December 2007

Image via Wikipedia

If you think the market is rigged to benefit the big players, you’re right. High-frequency trading, which uses sophisticated algorithms to snatch pennies on millions of trades, are actually front-running slower investors. Of course, no one calls it front-running, which is illegal, but that’s what it sounds like:

While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

via Traders Profit With Computers Set at High Speed – NYTimes.com.

And guess what happens next: The computers (no people involved, of course) use the advantage to buy more cheaply than other investors or to sell at higher prices. Even Goldman Sachs worries that the powerful high-tech tools can create an unfair advantage in the marketplace — at least when Goldman isn’t in charge of the tools. After a former employee uploaded proprietary data to a computer in Germany (by accident, says Sergey Aleynikov), the firm asserted that the software could enable users to “manipulate the markets in unfair ways.”

High-frequency trading now accounts for about half the volume on the New York Stock Exchange, the Times says. It also can account for a good slice of profits at the investment banks with the know-how and power. It’s time to close the loophole.

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2 thoughts on “High speed computers, unfair rules hurt stock investors

  1. If an individual had the capability to do this, oh say, Bill Clinton or Eric Spitzer, or even an unkown Joe Schmoe, wouldn’t any one of them be arrested, tried for this activity and put in shackles for the perp walk and immediately sent into the gulag of American prisons for those out of favor with those in favor? I don’t understand why people are not outraged by this practice that apparently has been employed by GS since 2005. If it is criminal, and I believe that it is and always was, then GS and any others who profited by this illegal means should be required to return the proceeds through some proper authority or conservator until it can all be sorted out to determine where this ill-gotten gain should fairly go. If GS and others claim they did not know it was illegal, their behavior suggests consciousness of guilt, because they did not advertise this rather impressive capability, they kept it secret.

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