This is a developing story, but one which has all the potential to explode if the right people hear about it.
I don’t have a strong opinion on this stuff yet, but I thought I’d put John Mauldin‘s take on the table and let everyone make up their own minds.
From Thoughts From the Frontline:
First I want to direct the attention of those in the US finance industry to a white paper written by Themis Trading, called “Toxic Equity Trading Order Flow on Wall Street.” Basically, they outline why volume and volatility have jumped so much since 2007; and it’s not due to the credit crisis. They estimate that 70% of the volume in today’s markets is from high-frequency program trading. They outline how large brokers and funds can buy and sell a stock for the same price and still make 0.5 cents. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.
The retail world doesn’t get to play. This is a game only for big boys who can afford to pay for the “arms” needed to fight this war. But the rest of us pay for the game, as that half cent is like a tax on transactions, not to mention the increased daily volatility, which skews pricing. Think it doesn’t affect you? That “tax” is paid by mutual funds, your pension fund, and every large institution.
Frankly, this is outrageous. The more I read the madder I got. And it is going to get worse as computers get faster and software more intelligent.
Mauldin goes on to discuss the Goldman Sachs programmer who stole the trading algorithm codes, then he provides a link to the correct contact people at the SEC should you wish to be heard on this topic.
Barry Ritholtz wrote up some questions related to what this type of trading may mean last week and I believe that there will be a lot more discussion on the subject in the coming week. If there isn’t, there should be.