Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How the SEC Profits from High-Frequency Trading

Politics / HFT May 02, 2014 - 03:02 PM GMT

By: Money_Morning

Politics

Shah Gilani writes: "The markets are not rigged."

That's what U.S. Securities and Exchange Commission Chairwoman Mary Jo White told a House of Representatives panel on Tuesday.

She went on to say, "The U.S. markets are the strongest and most reliable in the world."


Of course she's right. The U.S. markets are the strongest and most reliable in the world.

But she's either blind or deluded if she doesn't know they are also rigged...

The SEC's Case of Cultivated "Confusion"

What prompted Chair White's defense of the markets she and the SEC are charged with regulating to ensure they are fair and transparent was a point-blank question posed by Congressman Scott Garrett, a New Jersey Republican.

Mr. Garrett, who sits on the House Financial Services Committee, was referring to Michael Lewis' explosive book, Flash Boys, and Lewis' claim that high-frequency traders have rigged the markets.

Mary Jo White is not only not deluded, but she is extremely bright.

She has a B.A. from the College of William & Mary, an M.A. in psychology, and a law degree from Columbia Law School, where she was the Writing and Research Editor of the Columbia Law Review. In March of 1993 Ms. White was appointed by President Bill Clinton as U.S. Attorney for the Southern District, which reins over Wall Street.

In other words, she's no stranger to what insider trading really is.

She claimed that using high-speed access to exchange servers to determine market bids and offers before they are disseminated to the public, which is what high-frequency traders do to jump ahead of unsuspecting investors, doesn't actually meet the legal definition of "unlawful insider trading."

"There's some confusion about that," she said. It must have been Ms. White's law background and her tenure as a U.S. Attorney that so carefully measured her response.

What there isn't any confusion about is that the SEC has opened up an investigation into high-frequency trading. So have the FBI, the Justice Department, and the New York State's Attorney General.

The only confusion here is on the part of Ms. White. It boggles the mind to listen to the top regulator on Wall Street, of equity trading and all the stock exchanges, to say front-running public orders isn't at least some form of "insider trading."

Of course it is. The truth is the American public can't handle the truth.

The truth is that the Securities and Exchange Commission knows exactly how high-frequency traders operate, that they have unfair access to market data ahead of the public, and that they make billions of dollars a year plying their middleman, toll-taking techniques.

Mary Jo White, like her predecessors, has simply turned a blind eye to what's become of the markets. And the reason the regulators have turned a blind eye is that they have been paid to do so.

The SEC Won't Turn Off Their Money-Making Spigot

High-frequency traders pay exchanges for their order flow. That means even a start-up exchange with no business to speak of has a chance to grow into a bona-fide exchange that pays all kinds of registration and other fees to the SEC.

Exchanges want orders from brokers; their job is to match them and execute trades.

For exchanges to get orders sent to them, they pay brokerages for their order flow. "Order flow" refers to the orders that customers send to the likes of E-Trade, to Fidelity, to Charles Schwab, and to all the discount brokerage houses and every other brokerage house that isn't a big broker-dealer like Merrill Lynch. Merrill Lynch and the big broker-dealers trade off their own order flow, at the expense of its customers.

Where do the exchanges get the money to pay brokerages for their order flow? They are paid by HFT operators to look inside their servers that gather bids and offers on all the stocks they trade on their exchange. That's how the HFT lads get a sneak peak; they pay for it. It's how the game is run.

Mary Jo White has to pretend she's blind. The SEC has aided and abetted the growth of HFT.

The New York Stock Exchange had to come to them to ask if they could build a 400,000 square foot server farm in New Jersey. It wasn't for the NYSE to house their few servers, but to house the servers of HFT shops who are being charged top dollar to place their computers next to the Exchange's computers so their access time to them can only be counted in millionths of a second.

HFT operators then used their huge cash hoards and started buying up properties near the NYSE's new mega-warehouse, so they could be close but not have to pay exorbitant rental charges at the warehouse.

How could the SEC have allowed the NYSE to make a rule that forbids HFT shops from locating outside the warehouse, without knowing what was going on?

And then there are all the new order-types that exchanges get from HFT shops. Trust me, you've never heard of any of these order types, because they make no sense to an investor or trader who ever placed an order with an exchange to execute a trade for them.

What's the purpose of putting down an order to buy 50,000 shares at the limit price you specify and then wanting to cancel the order after you've bought only 100 shares? That's not a market order, or a limit order, or an order that any of us are familiar with. And I'm familiar with them all. That's a special order type that HFT shops had to ask exchanges to let them submit. And the SEC has to approve what the exchanges do.

The Questions That No One Will Ask

What's the purpose of an order like that? It's to "ping" the market, to see if there are a lot of shares to sell at the price probed. The HFT buyer didn't want to buy 50,000 shares, they just wanted to see how many shares are for sale. Why? So they can short the stock ahead of the sellers. There are all kinds of "new" orders like that one.

Someone needs to ask Mary Jo White, and I'd like to be the one, how did these new order types come about? Who uses them? Why and for what? And, who approved them?

I'd like to ask the SEC Chairwoman how much the exchanges they regulate make off HFT shops? How much does the SEC collect in fees from the exchanges and from HFT shops, and how much does all this new "business" add to their fee collection plate?

It's not that the SEC is living off these fees; it's that the money is being made somewhere, and if they don't know where it's being made under their watch, then they're either blind or in bed with everyone in the game.

And the truth is they are. That's why the markets are rigged. They're not rigged under the "legal definition" of rigged, as in a crooked rigging. They're rigged the way sails on a sailing ship are rigged. They are part of how the vessel gets from point A to point B.

It's just the way it is. Thanks to the SEC.

Source : http://moneymorning.com/2014/05/02/how-the-sec-profits-from-high-frequency-trading/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in