… the fundamental question is whether the extensive stock churn that is controlled by a select few who have the means for a positive IRR* on such an investment to take advantage of the windfalls, is merited especially in light of the oligopolistic nature of the HFT landscape. One needs merely to look at how promptly the Misha Malyshev led Teza was ejected from the ranks of the HFT players after what will soon evolve to be a fabricated scandal using Sergey Aleynikov as its primary pawn. [1] — WARNING: commenter complaints of aggressive banner ad &/or site exploit in progress at Seeking Alpha; as an alternative ZeroHedge has it posted here; *IRR == internal rate of return
I’m inclined to subscribe to that "fabricated scandal" scenario. After end-of-world scenarios that led the FBI and federal courts on a wild goose chase over the July 4th weekend, delays and negotiations have coagulated into a dying [2] fall [3] that looks engineered to sputter out over the Labor Day weekend.
At issue here is a WSJ op-ed [4] and defense of high-frequency trading by former SEC Chairman Arthur Levitt. Opposed to Levitt is Tyler Durden, founding persona of ZeroHedge, an anonymous blogging collective. As well as the above comment on what the Aleynikov affair means, they engaged Levitt’s pro-HFT arguments and suggested that he might also have some conflicting interests on this matter (links-of-fire were in the, obviously lightly edited, original).
… The "toll" collected by the few HFT vendors out there has been shown to be a substantial number: is it any surprise that Mr. Levitt vocal defense of an increasingly more spotlighted HFT comes at a time when he as advisor not only to HFT provider Getco but also to primary NYSE PT monopolist Goldman Sachs. Granted, Mr. Levitt does not disclose these conflicts of interest in his piece – perhaps the information would be seen in a slightly different light were that to be the case. …
Most of the outraged earlier voices on this story arc have been quiet lately including Matt Goldstein, the MSM’s point-man on this beat.
UPDATE: The good folks at Asia Times often have something useful to say in this area. This article [6] makes a pretty good case for a Tobin tax.
By making HFT an integral part of their operations, such traders are using their privileged position to extract rents from the public just as surely as was David Lloyd George in profiting from his insider knowledge of the Marconi contracts.
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MORE (8/19): Arthur on HFT, hat tip … Tyler (sporting that, even if he did manage to hang himself if you’re listening carefully)
Four weeks ago one of the ZeroHedge personas launched a profanity-laden rant [5] at institutional fiduciaries. If you strip out the pottie language it reads a bit like prophecy. They see processes that are systematically stripping society of its wealth and lining the pockets of the few, and they are taking the opportunity of an anonymous collective to proclaim this to the rafters.
Actually, that’s also my view of HFT. I read that first quote above and see in my mind’s eye a Frankenstein’s Monster wired up in a secret laboratory in Mahwah, NJ, being pumped chock full of electronic dollars until he awakens as a sort of 21st Century J. P. Morgan to rule over the financial universe.
Unfortunately, even now that quote is going to read like complete gobbledygook for most people. Not to mention Levitt getting to broadcast at 55 dB above what Durden does. Fortunately, that’s not going to mean much once the historians get around to sorting out this mess.
NEW YORK (Reuters) – The lawyer for a former Goldman Sachs Group Inc computer programer facing criminal charges of stealing trade secrets from the firm is in talks with a U.S. prosecutor on a possible resolution of the case, court documents said on Monday.
NEW YORK (Reuters) – A federal judge has granted more time for the government to seek an indictment against or work out a settlement with a former Goldman Sachs Group Inc programer accused of stealing trade secrets, after the programmer’s lawyer said she wants the case dismissed.
High-frequency trading is, in many respects, just the next stage in the ongoing technological innovation of financial markets. Just as paper tickets for trades were replaced by computer orders, and the trading floor seen on television was made largely irrelevant by electronic exchanges, so has high-frequency trading revolutionized the way most U.S. stocks and related investment products are priced and sold.
With the proliferation of markets and the spread of computer-based trading after 1980, the advantages of inside information about fund flows have multiplied. Computers are able to react in milliseconds and take advantage almost instantaneously of new information about fund flows. Trading with such inside information, repeated in thousands of transactions daily, is a major advantage for houses which control a substantial percentage of the order volume. It has thus contributed greatly to the expansion and oligopolization of Wall Street. …
…
In the purest economic sense, Wall Street has been able to extract an ever-increasing rent from the market.
“… the fundamental question is whether the extensive stock churn that is controlled by a select few who have the means for a positive IRR* on such an investment to take advantage of the windfalls, is merited especially in light of the oligopolistic nature of the HFT landscape.”
Churning of accounts is already governed by SEC Rule 15c1-7. If the SEC is not concerned with enforcement, it may be the result of regulatory capture, i.e., Goldman Sachs is the tail that wags the dog.
Moreover, any economic activity that requires government licensure and the collection of fees in order to practice a trade, will prove an impediment to market entry. This facilitates the “oligopoly” being disingenuously decried here.
Attempting to remedy either ill is like asking a cop to arrest a fellow-officer who he just witnessed committing a traffic violation.
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“… the fundamental question is whether the extensive stock churn that is controlled by a select few who have the means for a positive IRR* on such an investment to take advantage of the windfalls, is merited especially in light of the oligopolistic nature of the HFT landscape.”
Churning of accounts is already governed by SEC Rule 15c1-7. If the SEC is not concerned with enforcement, it may be the result of regulatory capture, i.e., Goldman Sachs is the tail that wags the dog.
Moreover, any economic activity that requires government licensure and the collection of fees in order to practice a trade, will prove an impediment to market entry. This facilitates the “oligopoly” being disingenuously decried here.
Attempting to remedy either ill is like asking a cop to arrest a fellow-officer who he just witnessed committing a traffic violation.
It ain’t never gonna happen.