High-speed traders on inside track
Michael Lewis' new book, “Flash Boys: A Wall Street Revolt,” has caused a tremor among investors. A fictionalized account, it nevertheless highlights a long-suspected fear that Wall Street stock markets are rigged in favor of high-frequency or high-speed traders.
These traders apparently use detailed information and high-speed connections to make billions of dollars in incremental amounts so small and hidden that they can escape the eyes of regulators. High-frequency trading, and particularly the privileged data stream connections it enjoys, does appear to put normal investors at an unfair disadvantage.
The sophisticated computer algorithms and trading strategies are carried out by computer in milliseconds.
The argument over high-frequency trading does not center on speed or sophisticated software, which might be considered an acceptable competitive advantage. Rather, the criticism is focused on the clearly privileged data feeds offered by stock exchanges to proprietary clients — at a price. Questions arise as to whether this privileged information leads to “insider trading,” which has been illegal for more than 80 years.
According to Bloomberg Businessweek, New York Attorney General Eric Schneiderman described high-frequency trading as “insider trading 2.0.”
It offers opportunities for “front running” and “quote stuffing,” whereby 10,000 instantly canceled orders can create synthetic buying or selling pressure affecting other orders.
Stock exchanges disseminate the latest stock price information to the public through a consolidated data feed to the public securities information processor. Exchanges sell more detailed “proprietary data” directly to subscribers. By law, both data feeds must be entered simultaneously. But it is the onward transmission that creates a possible unfair advantage. The faster and more full information transmitted through proprietary systems appears to favor financial “fat cats.”
Such favors appear to be expensive and very profitable for the exchanges. Bloomberg reports that NASDAQ's proprietary revenues increased two-fold between 2006 and 2012 to $150 million. Meanwhile, its feed revenue to “conventional” investors fell by 21 percent.
High-frequency traders pay for timely price data of increased depth. More concerning, they pay even more for hyper-speed, onward data transmission by means of faster computer processing, fiber-optic cables and laser beams.
High-frequency trades are so fast that even the speed of light becomes a limitation. Both travel at essentially the same speed of 186,282 miles a second, or “only” 186 miles in a millisecond. Therefore, high-frequency traders locate their data collection points as close as possible to stock exchange data distribution points.
Sophisticated people would not go to these extreme lengths unless it was outrageously profitable — even unfairly profitable.
At a glance, it appears that these trading practices and the distribution of price data from exchanges are in need of serious examination by regulators so that the playing field is not as uneven as the computer simulated destruction of Heinz Field in the movie “The Dark Knight Rises.”
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Contact him at firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Duquesne University football player died by suicide
- Steelers not limiting themselves in free agency
- Winter storm causes flight cancellations
- Pirates notebook: Sadler gets first Grapefruit start
- Pitt women end regular season with win over Clemson
- Rossi: Pirates must pay for Mr. Right
- Vehicle windows broken in Brighton Heights and Spring Garden
- Icy roads cause multiple vehicle accidents Sunday evening
- National Weather Service predicts up to 7 inches of snow before Sunday night
- Arrogant media elites mock Middle America
- Coyotes proliferate despite year-round hunting