Trading on Wall Street manipulate market

Toxic Equity trading takes money from genuine investors and gives it to the high frequency traders who have the best computers. It is called algorithmic trading providing a bogus impression of volume that is traded, and in reality doesn’t exist.

Goldman Sachs went after an employee who stole some of its latest and greatest software. The US assistant attorney general said in the courtroom “that the software had the potential to manipulate the market.”

A paper written by Themis Trading, called "Toxic Equity Trading Order Flow on Wall Street. Reports: “Basically, they outline why volume and volatility have jumped so much since 2007; and it's not due to the credit crisis. They estimate that 70% of the volume in today's markets is from high-frequency program trading. They outline how large brokers and funds can buy and sell a stock for the same price and still make 0.5 cents. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.”

Honestly, this is shocking. The more is read in this paper the angrier one gets. It is going to get worse as computers get faster and software more intelligent. Themis suggests one simple rule: “just make it a rule that all bids have to be good for at least one second. That would cure a lot of problems. One lousy second! In a world of microseconds, that is an eternity.”

All this "algorithmic” trading gives a very false impression of volume. If you are a fund and see 10 million shares a day traded, you might feel comfortable that you could hold one million shares and exit your trade easily. But if 80% of the volume is false by the use of "algo" trading, that volume isn't really there. You may have a position that will be a problem if you want to exit, and not know it.

"High-frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from genuine investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, while investors don’t even know it." Writes Themis Trading.

Billions of dollars are involved. This is a lot more important than the salaries of investment professionals, for which the Obama administration today suggested new rules. The SEC needs to step in and stop this.


Source: Themis Trading at http://www.themistrading.com/.

The link to the white paper is at:
http://www.themistrading.com/article_files/0000/0348/Toxic_Equity_Trading_on_Wall_Street_12-17-08.pdf.