… small and Large. Sunday was the 2nd anniversary of the May 6th Flash Crash of 2010. High Frequency Trading (HFT) insiders have hacked the stock markets so they get a sneak peak at your, and everyone’s trades before they’re executed. Think of it like one player at the poker table can secretly see your cards, and everyone else’s before they bet- Want to play in that casino?
When the HFT trading robots all lock onto the same pattern they can take a major market like the Dow Jones Industrial Average down 700 points in 10 minutes and thus we all remember the Flash Crash. Now it so happened that that time the market recovered about 70% of the loss shortly after but the damage to confidence was done.
Once bitten, twice shy. Or as Joe Saluzzi and Sal Arnuk at Themis Trading (a specialty company that trades equities for large institutions and hedge funds- stock traders not OWS supporters) put it: ” traditional retail and institutional buyers and sellers of stock have been steadily waking up to the dangers of drinking at the increasingly dangerous ”stock market watering hole”. Like the animals on the Serengeti, who for years were accustomed to sipping long and heartily at their favorite spot, retail and institutional investors now see what’s beneath the surface. And they are deciding that the drink they crave is just not worth the risk.
It isn’t hard to blame them. They have witnessed a radical transformation of the best capital allocation market system in the world, into one where:
– 13 stock exchanges cater to hyper traders who game the system, chasing exchange rebates, and leveraging speed for the purpose of a nanosecond scalping dance.
– More than 40 dark pools together trade more than 1/3rd of all shares.
– Conflicts of interest abound as exchanges own stakes in dark pools, and HFT firms own stakes in exchanges.
– Brokerage firm internalization of trades feeds the HFT financial modeling of investor orders.
– Exchange data feeds act as a veritable DVR of investor orders and behavior, the recording of which is then sold to HFTs.
– Rogue exchange traded products break down, trap unsophisticated investors, and only enrich the issuers, exchanges, and HFT firms that make markets in them.
– HFT firms in the last decade have achieved wondrous profitability (double-digit Sharpe ratios) while investors at best have clawed back to even.
– More than $1 billion in customer-segregated monies goes missing from MF Global, with not a single prosecution, nor a hope of redress.”
Investors are voting with their feet: “More than $250 billion in long term equity funds has retreated from the markets since May 6th, 2010 – despite a slow but steady improvement in the economy and a stock market that has nearly doubled since the 2009 lows. It isn’t that these investors don’t have confidence in the economy. They don’t have confidence in our markets.”
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To read Sal and Joe’s whole piece on their blog: The Flash Crash of 2010: Happy 2nd Anniversary
To read their Barron’s piece that includes a more detailed explanation of how HFT works: Happy Flash Crash
To reserve their book on the dangers of HFT (to be released June 3rd) on Amazon: Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio.
Hat Tip: Barry Ritholtz