High Frequency Trading and Why I Couldn’t Care Less

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Rarely do I mention trading here at SF, but late last week, a story emerged that certain Wall Street firms have — allegedly — rigged the system so they could peek at the incoming buy orders before the order is actually placed.

So you’re telling me that someone may actually try to cheat the system?

No? Say it ain’t so!

Senators are pissed off. The SEC is supposedly looking into it. Those engaging in the so called “high frequency trading” aren’t saying a word. It’s the same old song and dance, just a different day with a different rant.

I say, ignore it all.

Like many, I was relatively upset by the fact that retail investors might not be playing on a level playing field. Then I realized, when has investing (specifically trading) ever been fair?

There are far more shady dealings going down on Wall Street than high frequency trading.

Ever wonder why 20,000 calls (option contracts) are bought several days before a big news release? Or how Ken Lewis and many other financial institutions had closed door meetings with the Fed, and a few weeks later bought a ton of company stock at it’s lowest price in 15 years?

I’d rather have solutions for these acts of financial in-the-know mischief, than someone waste my time with stories about companies who were smart enough to hire a few brainiac “IT consultants” to jerry rig a program to see incoming buy orders.

Perhaps the best response to this story came from Guy Adami on CNBC’s Fast Money.

If you’re worried about this [high frequency trading], you’re worried about the wrong things.

Focus on what you can control. Learn your technicals. Learn your fundamentals.

All this stuff is just weekend conversation.

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Minute marker 1:15 for high frequency trading conversation

Anyone else agree with me?

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Posted by Matt SF @ 31 July 2009 4 comments

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Aug 5, 2009
9:37 pm

#1 Mike :

I wonder how the size and liquidity of the stock changes the effectiveness of the “technique”. i.e: would highly liquid large caps be less affected than relatively illiquid small caps?

[Reply]

Matt Reply:
August 5th, 2009 at 10:26 pm

Good question. I would think that would depend on the speed of the computers doing the flash trading. You just know some firms are out there competing for the fastest system possible.

I would also think that when you’re trading a relatively illiquid stock/ETF, you could potentially get more profit considering the bids & asks usually have a larger price gap. But with highly liquid stocks, you would get more opportunities to use the technology.

If the technology is as automated as it sounds, it probably has a few variables you can tweak to match your needs.

[Reply]

Aug 6, 2009
7:38 pm

#2 Mike :

I’m sold, where can I buy this software? ;-)

[Reply]

Matt Reply:
August 6th, 2009 at 10:31 pm

Ha! No kidding. I remember when having real time quotes meant you were special.

I’m curious if there has been an unofficial policy where the highest bidders were granted access to such software. Could it potentially become available to high net worth traders outside of an investment bank?

It may not matter anyway considering the SEC will likely ban it in the future.

[Reply]