Computerized Front Running: A Computer Program Made To Save The Free Market Turned Into A Monster

[Are_grits_groceries]

Computerized Front Running: How A Computer Program Designed To Save The Free Market Turned Into A Monster – Ellen Brown
<snip>
Also called High Frequency Trading (HFT) or “black box trading,” automated program trading uses high-speed computers governed by complex algorithms (instructions to the computer) to analyze data and transact orders in massive quantities at very high speeds. Like the poker player peeking in a mirror to see his opponent’s cards, HFT allows the program trader to peek at major incoming orders and jump in front of them to skim profits off the top. And these large institutional orders are our money — our pension funds, mutual funds, and 401Ks.

When “market making” (matching buyers with sellers) was done strictly by human brokers on the floor of the stock exchange, manipulations and front running were considered an acceptable (if morally dubious) price to pay for continuously “liquid” markets. But front running by computer, using complex trading programs, is an entirely different species of fraud. A minor flaw in the system has morphed into a monster. Keiser maintains that computerized front running with HFT has become the principal business of Wall Street and the primary force driving most of the volume on exchanges, contributing not only to a large portion of trading profits but to the manipulation of markets for economic and political ends.
<snip>
Flash Trades: How the Game Is Rigged

How this is done was explained by Karl Denninger in an insightful post on Seeking Alpha in July 2009:

“Let’s say that there is a buyer willing to buy 100,000 shares of BRCM with a limit price of $26.40. That is, the buyer will accept any price up to $26.40. But the market at this particular moment in time is at $26.10, or thirty cents lower.

“So the computers, having detected via their ‘flash orders’ (which ought to be illegal) that there is a desire for Broadcom shares, start to issue tiny (typically 100 share lots) ‘immediate or cancel’ orders – IOCs – to sell at $26.20. If that order is ‘eaten’ the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.

“Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become ‘more efficient.’

“Nonsense; there was no ‘real seller’ at any of these prices! This pattern of offering was intended to do one and only one thing — manipulate the market by discovering what is supposed to be a hidden piece of information — the other side’s limit price!

“With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit. But the computers are so fast that unless you own one of the same speed you have no chance to do this — your order is immediately ‘raped’ at the full limit price! . . . ou got screwed for 29 cents per share which was quite literally stolen by the HFT firms that probed your book before you could detect the activity, determined your maximum price, and then sold to you as close to your maximum price as was possible.”
<snip>
The Notorious Market-Rigging Ringleader, Goldman Sachs
<snip>
Unlike the NYSE, which is open only from 10 am to 4 pm EST daily, ATSs trade around the clock; and they are particularly busy when the NYSE is closed, when stocks are thinly traded and easily manipulated. Tyler Durden writes:

“As the market keeps going up day in and day out, regardless of the deteriorating economic conditions, it is just these HFT’s that determine the overall market direction, usually without fundamental or technical reason. And based on a few lines of code, retail investors get suckered into a rising market that has nothing to do with green shoots or some Chinese firms buying a few hundred extra Intel servers: HFTs are merely perpetuating the same ponzi market mythology last seen in the Madoff case, but on a massively larger scale.”

HFT rigging helps explain how Goldman Sachs earned at least $100 million per day from its trading division, day after day, on 116 out of 194 trading days through the end of September 2009. It’s like taking candy from a baby, when you can see the other players’ cards.

There's more: http://dprogram.net/2010/04/23/computerized-front-running-how-a-computer-program-designed-to-save-the-free-market-turned-into-a-monster-ellen-brown/

An article that explains terms such as ATS, HFT, etc.
Opaque Trades
http://www.imf.org/external/pubs/ft/fandd/2010/03/dodd.htm

Check Out What Legal Front-Running On RBS Preferred Stock Looks Like Second-To-Second
http://finance.yahoo.com/news/Check-Out-What-Legal-siliconalley-3904409250.html?x=0&.v=2

There is a lot of info about this practice. If you really want to understand the ins and outs of this practice, it is worth investigating. I posted a few articles. Their are too many to note that detail this practice.

""HFT has quickly come to dominate the exchanges. High-frequency-trading firms now account for 73% of all U.S. equity trades, although they represent only 2% of the approximately 20,000 firms in operation."
In finance, equity trading is the buying and selling of company stock shares.
Loopholes in market rules give high-speed investors an early glance at how others are trading."

Frontrunning is illegal. However, loopholes allow HFTs to be used. As far as I can tell, there is only a technical difference between what is or isn't legal.

As long as these high speed trades are allowed, the market is really rigged, and it has been for a while. As computers increase in speed and the algorithms used become more efficient, this will only increase the rigging.

The financial reform bill does not address this problem sufficiently if at all. Many believe that the huge
'fat finger on the keyboard' crash was really a manipulation of the market as a warning by tweaking an algorithm.

After following all of this, I know I don't understand the half of it. There are so many ways to trade and financial products such as derivatives developed, I do believe that essentially the system hasn't been changed enough. With HFTs and other mechanisms, the traders are far outpacing any ability to control them at present. The system has always been rigged in some way. However, rigging it automatically in milliseconds 24/7 is a whole different ballgame.

Place your bets.

[Vinnie From Indy]

1. A tiny elite preying on the rest of society !

I'm shocked!

The most insidious part of the whole affair is that Wall Street titans merely had to pay ONE day's illegal haul from raping John Q. Public to Congress to own them lock, stock and barrel. Our government has been acquired by corporate interests folks. We are now only livestock.

[Are_grits_groceries]

2. I was looking into the details about

this method used by the tiny elites. I keep hearing people talk about controlling HFT operators and other reforms. I don't know exactly how in this day and age.

[rucky]

3. Great articles - K&R

the first one is a must read