Monday, March 31, 2014

But it's the only game in town

By Donald Sensing

High-frequency trading is computerized stock trading done programmatically, without human operation. Using ultra-speed data connection to computers at stock exchanges, HFT computers can buy and sell enormous blocks of stocks with a tiny fraction of a second.

"Front running" is when Trader A places an order for, say, 300,000 shares of Consolidated Amalgamated and that order is electronically detected at a data hub by an HFT system. The HFT computer enjoys a much faster connection to the exchange. The HFT computer sends a buy order to the exchange for 300,000 shares of Con-Am; the order arrives three milliseconds before Trader A's.

In that three milliseconds, the HFT order drives the price of Con-Am stock up one penny. Trader A  just lost $3,000 on the buy. Trader A's order drives Con-Am up another penny in another three milliseconds. Then the HFT sells. The HFT system just made $6,000 in six milliseconds.

The first place his orders were landing was the BATS Exchange across the river in Weehawken, N.J., and high-frequency traders were lying there in wait. 
Michael Lewis: Brad realizes, "Oh my God, that's how I'm being front-runned. I'm being front-runned because my signal gets to the BATS Exchange first and they can beat me to all the, all the other exchanges." 
It only took a tiny fraction of a second for Brad's trade to reach the next exchanges on the network, but the high-speed traders were able to jump in front of him, buy the same stock and drive the price up before his order arrived, producing a small profit of just one or two pennies. But it was happening to everyone's trades millions of times a day.
That's why HFT trades make tens of billions of dollars per year. And that's why author Michael Lewis says that the stock market is rigged. If you own a retirement fund or you invest on your own, this is worth your while to see.

Is the U.S. stock market rigged? - CBS News

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