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.
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.