The U.S. Stock Market is merely computerized trickery (USA Today)

By Matt Krantz, USA TODAY
7/9/10

The time it takes to read this sentence is all it takes for nearly 2 million stock trades to flash through the stock market.


Most of those trades aren't coming from trigger-happy day traders and mutual fund managers with billions of dollars at their disposal. It's a flood of machine-gun speed fury coming from an army of computers programmed to obey complicated algorithms that are hyperactively buying and selling.

What does that mean to you, the individual investor? The next time you buy or sell a stock, forget the quaint idea that there is a living, breathing human being on the other side of the transaction. You're trading with a computer.

Not only are the markets completely computerized, more than half of the market's volume is churned by computers programmed to spot certain patterns in trading. These machines see stocks not as securities used by companies to raise money, but rather, symbols, numbers and bits that are traded, swapped and exchanged.

And now, traders say, humans are responding to machines rather than the other way around. Increasingly, too, the machines are reacting to each other, trying to second-guess what their next moves might be on how to take advantage of an edge that might be gone in milliseconds.

"There are no real buyers or sellers," says Joe Saluzzi, trader at Themis Trading. "It's all about the machines."

•Digital "painting the tape." One of the ways traders misled investors in the past was by conducting sham trades with themselves. A trader might enter orders to buy and sell shares of a stock between two entities it controls, giving the false impression there's strong investor interest for the stock at certain prices. This is called painting the tape.

The intent is to fool other investors into thinking this false trading was real, and tempt them into trading based on that information. It's similar to how a crooked eBay seller might improperly use another username to bid on an item, misleading legitimate buyers about the true value of the item.

Painting the tape is illegal. However, modern technology allows traders to essentially perform the same trick in a way that's hard for regulators to detect, says Eric Hunsader, founder of market data feed provider Nanex.

Rapid-fire computer systems allow sophisticated traders, including the giant Wall Street firms, to post bid (buy) and offer (sell) prices they have no intention of actually following through on, he says. For instance, a firm might post a bid for a stock showing they want to buy at a certain price. But by the time investors interested in selling at that price get their order to the market, the false buyer yanks the electronic bid literally faster than a blink of the eye, Hunsader says. This interplay happens in milliseconds, making it difficult to detect.

•Swamping the market with trades. If your e-mail box is filling up with spam, you've already experienced another distortion technology is bringing to the stock markets.

Thanks to low-cost and automated trading, trading firms can swamp markets with a deluge of buy and sell orders in a way that gives them an advantage, Hunsader says.

As other firms must parse through the extraneous trades, slowing them down, the firms behind the pseudo bids and offers can ignore them, saving them milliseconds of analysis time. This gives their computers valuable extra milliseconds to parse true trends in the market and gain an advantage, Hunsader says.

Think of it this way: Imagine that a winning lottery number is e-mailed to two people at the same time, and whoever reads the message first wins the prize. Quickly, one of the people cleverly e-mails millions of spam messages to the other person who also received the e-mail. The spam recipient will need to sort through those e-mails to find the one with the winning lottery number, giving the spam sender time to claim the prize.

The sheer volume of trades is staggering. During the day of the May market meltdown, for instance, more than 19 billion transactions moved, according to regulators. It would take a person more than 100 years to simply count to 1 billion, he says, so anyone who knows some of those trades can be ignored gets a huge advantage. Link to complete article

Grandpa: if a reporter for USA Today has the information, where is Mary Schapiro and her band of misfits? You know, the organization that has the following Mission Statement:
 
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.