The list of markets where big players are cheating the rest of us (and each other) keeps growing. First there was the Libor interest rate, then foreign exchange, then gold. And now comes high-frequency trading (HFT), where Wall Street banks use supercomputers to monitor incoming stock market orders, analyze their likely impact on prices, and place orders ahead of those trades to capture a bit of the price impact. In an HFT-dominated market, individual investors get fractionally-less-favorable prices, which they seldom notice, while in the aggregate billions of dollars are siphoned each year from retail investors, pension funds and even some hedge funds to big Wall Street banks.
Since this practice adds absolutely nothing to the efficiency of the equity markets, and since “front running” is clearly illegal, HFT is a crime without offsetting social benefits. But Wall Street gets away with it — and will continue to get away with it — because the major banks and exchanges make a lot of money from it and donate sufficiently to both major parties to buy a degree of immunity.
Because HFT is the topic of Michael Lewis’ best-selling book Flash Boys, and Lewis is showing up on mainstream outlets like CNN and Good Morning America where he explains the con in layman’s terms, the powers that be now feel compelled to appear to investigate it.
Like the ongoing probes of Libor, foreign exchange and gold, the result will be more show than substance. A few fines will be paid and possibly a few mid-level quants will be sacrificed, while Wall Street’s bonus pool stays deep and wide. So HFT’s exposure, rather than being that big a deal in and of itself, should be seen as part of a pattern of systematic corruption, yet another brick in the wall that separates the financial/political/con artist class from the vast bulk of people who are being harvested.
But the fact that this scandal is being explained on mainstream outlets by a best-selling author means that it is reaching a much broader audience. Lewis isn’t preaching to the choir; he’s bringing the idea that the financial system is a rigged casino to people who hadn’t previously given it much thought. In so doing, he’s accelerating the shrinkage of the trust horizon.
This last term comes from Nicole Foss at Automatic Earth and refers to the process by which people gradually realize that their country’s big systems — the government, banks, national currency, etc. — have been captured/corrupted by people who now run those systems for their rather than the public’s benefit. Seeing this, individuals stop trusting those big systems and shift their attention and resources to people and institutions that they can see and judge face-to-face. They start buying local food rather than national brands, home school their kids, stop identifying with the two major political parties, put their money in local rather than money center banks, and buy hard assets like precious metals and farmland rather than financial assets like stocks and bonds.
When a critical mass of people start behaving this way the big systems are starved for capital and begin to fail. Banks go bust, governments run out of money, the currency collapses, etc. That day appears to be coming, and HFT may have given the trend a little added momentum.
Let’s hope so, and I think it will. I can’t think of any way to make it look benign. My guess is that “front running” is actually legal but under the circumstances clearly immoral, and what will be even more damning will be in trying to parse the difference between public market information theoretically available for all and “insider’s” information available only for those with the technology to obtain it.
That it is immoral and corrupt is not in question. Is restitution just, or socialism?
Will they give back the country that used to belong to you? Not likely There is going to be hell to pay and we are going to pay it.
John,you haven’t even mentioned naked shorts,pump & dump,rehypothication,& other wild schemes.
I believe that the economy is quickly reaching a point at which it will collapse.My reasons are thus: 1)To pay for all of this madness the “F.I.R.E.Industries”are looting the middle class of it’s wealth,In Europe they call it austerity,a fancy name for wealth redistribution.They are looting the middle class because the poor have nothing to expropriate & the super wealthy won’t allow themselves to be looted,the middle class is all that is left.A major problem is that we have a mostly consumer economy & if you destroy the middle class you destroy the economy it supports.What will the big producers do when they no longer have customers to sell their products to?
2)Because they have little,if any,fear of risk,the Wall Street casino players take enormous chances.They have no fear of losses because they believe that the Fed. will pay for their losses with taxpayer money.Also,the financial regulatory agencies are a complete joke,they are often in collusion,looking the other way,when regulations are by-passed by the Wall Street hustlers,no individuals are prosecuted.
3)At the very end,when there is no one left to loot, the Wall Street crowd will begin to feed on each other,hastening the collapse.
P.S.If you want to know more,ask David Stockman!
After so much water has passed beneath the bridge, why should HFT make any difference. Apathy is the predominant state most people are in right now and their ignorance of the markets is astounding. Something’s got to give though, somehow, somewhere.
How about the great refusal to continue to play the game. No sitting in the back of the bus. Your allegience is pledged to the Constitution of The United States and the population which it serves
It is too late to fix it because power is not absolute as well as totally corrupted and for them it had been fixed to end this way with 7% of the world’s population owning 54% of this planet and 1% of the population earning 51% of the GDP