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Tuesday, January 19, 2010

Editorial on High Frequency Trading/Front Running of the equity market

The equity market has evolved into a gamer’s paradise. Over 50% of the anemic daily volume is comprised of algorithmic based trading. The computers trade amongst themselves and data that flows over the wires is irrelevant to the direction of the market. The programs control the market.

There was a time (not that long ago) when economic reports, stories of political unrest and earnings results directly impacted the course of the market. This is no longer the case as the market has been inoculated against all that might invade its system. The gamers simply crack open a Red Bull, grab a handful of Cheetos and check their programming code for the next day of trading.

The present “market” environment is great for the bailed out institutions given the fact that they are now “banks” with access to the Federal Reserve window for bags of very inexpensive money dump it on the trading desks and we are off to the races. The “banks” are earning huge sums via their trading desk versus the laborious and nominal margins associated with lending money, as that is “old school”.

This environment is also most conducive to the journalism majors turned financial pundits at CNBC. They have no programming challenges as the market (like home values) will go up forever so they can confidently parade around bulls as though they were televising a cattle auction.

One day (assuming the SEC leaves the cave after years of hibernation) the Red Bull/Cheetos gang will move on and the market might actually be deemed transparent and played on a level field. Be very careful of this world investors, when the formula experiences a glitch, the high frequency carnival leaves town and all that remains is an ominous flushing sound. During the interim, the machine wants you to feel good when you open that statement however it is simply an interim illusion.
Old School Equity Market







New Order of High Frequency/Front Running Trading

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