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Tags: finance, investing, is high frequency trading fair
 According to Bloomberg news, the U.S. stock market may face its biggest challenge in the form of Senator Charles Schumer (D-NY). As the third ranking senate democrat and a member of the powerful Senate Banking Committee, Schumer is asking the Securities and Exchange Commission to investigate the matter of flash orders.
In fact, Senator Schumer told SEC Chair Mary Schapiro in a letter that if the SEC does not act on his request, he will introduce legislation that will ban flash orders. Otherwise known as high frequency trading, it is the latest development in Wall Street and one that is currently the most talked about.
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Basically it’s the use of very powerful computers that allows high frequency traders to send millions of orders within milliseconds—outsmarting most human investors and many computer ones as well. With that in mind the question most investors have is: is high frequency trading fair? Supporters of the high frequency trading system argue that it provides a lot of liquidity and as David Lutz, a managing director of equity trading at Stifel Nicolaus & Co.
in Baltimore contends “it increases the likelihood that buyers and sellers will agree on a price.” On the other hand, critics argue that high frequency trading allows but a handful of people to “master the stock market, look at other investors' orders beforehand and, even subtly manipulate share prices.” They say that the regular investor with their regular computers cannot compete with the more powerful Wall Street computers which run powerful algorithms that “execute millions of orders a second and scan dozens of public and private marketplaces simultaneously.” This means that these computers which do high frequency trading can “spot trends before other investors can blink, changing orders and strategies within milliseconds.” The biggest advantage that high frequency trading gives investors in the know is the insider information.
Supposedly the markets ensure transparency by showing orders to everyone simultaneously but in reality, a loophole in regulations allows them to show some orders to selected people ahead of everyone else in exchange for a fee. And that is the major irk that Senator Schumer has concerning high frequency trading.
He said that brokers with this kind of technology can “profit from advanced knowledge of buying and selling activity.” At the same time “this kind of unfair access seriously compromises the integrity of our markets and creates a two-tiered system, where a privileged group of insiders receives preferential treatment,” Schumer continues by saying that “if allowed to continue, these practices will undermine the confidence of ordinary investors, and drive them away from our capital markets.” It is true that high frequency trading flies in the face of regulations that have been created to create “a level playing field for all investors and make pricing information more accessible.” There have been calls for the SEC to look at the situation more closely.
From a legal standpoint, unless the loopholes are closed off this practice will still continue—although I will say they are walking a fine line in that regard. Ethically, that’s a different matter altogether. Yes money is the object but sometimes you wonder at what costs? More importantly while we grate against more regulations, it is because of situations like this that regulations are created.
It is up to those in the market and the SEC if they want it to be forced from the top or do it themselves. This is something that bears close watching now and in the future.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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