Vail Valley Voices: The high-tech casino
Vail, CO Colorado
Since the recent demonstration of the predominant role in today’s markets of a handful of high-frequency trading computers, a very public demonstration called last month’s 1,000-point Dow afternoon mini-crash, everyone who invests their money in stocks and bonds should be aware that something has changed in the way markets operate.
It’s change you’d best believe in, too.
Such high-frequency trades now account for more than 70 percent of daily stock-price movement. Most of this is in billions of sub-penny bids, offered millions of times a second and offered with advance knowledge of actual orders, thanks to NYSE-provided exchange pre-trade order data streams.
High-frequency trading doesn’t show up as real volume on the exchanges since it takes place milliseconds before actual trades are allowed to happen and front-runs real stock trades to move stock prices and index values in whatever direction the high-frequency trading programmers desire.
Generally, that’s up.
For example, you offer to buy 100 shares of General Algo at $25 per share. A high-frequency trading system sees your offer before it goes to the market and counters with an offer at $25.01, again before the actual trade takes place. You lose your bid and decide to offer $25.02. Rise and repeat until the desired spread programmed into the high frequency trading is met. Then you are allowed to buy – at a higher price.
In many cases, your purchase was made through the same firm whose own high-frequency trading machine just bid up your
More insulting, in many cases, they are the actual seller of the stock you paid an artificially higher price for, selling shares they owned to you, their client, from their own holdings.
Because of this, the overall stock-market value now moves up and up on very low actual trading volume since the price movement occurs before the real trades.
If you are another firm’s high-frequency trading algo and system, the whole thing takes place in less than a millisecond, and the machines run all day and all night long, trading all over the world. It’s a computer game played between computers, programmed by mathematicians to whom the world is nothing more than a manipulated data stream, not your life savings or trillions in taxpayer guarantees.
There’s no record in the daily market reports of the front-running process other than constant telltale signs like record share-price advances on record lows in actual trading volume over a year’s time. Or investment banks like Goldman Sachs that now have gone months without one single down day in their proprietary trading operations, including the day of the mini-crash – a statistical impossibility in a real marketplace.
There was a reason that this activity was illegal before the “financial reform and innovation” of the past decade since front-running turns a free marketplace into nothing more than a house-rigged casino. It was never more obvious that with the mini-crash and recovery of couple of weeks ago when, for whatever reason, all “buying” and “buyers” (high-frequency trading offers) simply evaporated one afternoon while the algos fought to stop losses at light speed, causing an immediate 1,000-point drop in the Dow before the “buyers” returned 10 minutes later. Then, within just a few more minutes, a miracle “recovery” took place as the algos fought to buy, buy, buy at light speed.
The few real trades that were made during the demonstration of computing power were later cancelled by the market operators, so no real people actually were able to buy Yahoo! for a penny.
There has been some question about the timing of this event, coming as it did within an hour of a Senate committee vote that would have re-regulated investment banking. The bill failed to pass the committee vote, that’s for certain, and has since been weakened to the point of acceptability to the banking lobby.
The comments sections of many websites published by and read by professional fund traders have been ripe with discussions over the entire past year concerning the total lack of any rational market behavior or fundamentals as well as the lack of trading volume unless the market is falling.
“Business fundamentals simply don’t matter anymore” is a common theme. “It’s nothing but algos written by math Ph.Ds now.”
An algo, or algorithm, is an instruction set in a computer program that looks at raw data and acts upon it according to its programming instructions.
This recent summation of a recent trading day, when the Dow hit sub- 10,000 territory for the first time since November, offered by a commenter on Zero Hedge, is fairly typical of the way a lot of traders now view the relationship between the stock markets and government bond selling:
“First, push the index futures down 2 percent overnight on zero-volume high-frequency trading. Then, shut down the NYSE computers at the market open to block any real sell orders from taking place. The ‘scared money’ runs to the weekly Treasury auction as a safe haven, forcing down rates. As soon as the auction is over, light up the high-frequency trading algos and lift the Dow to a green close. Rinse and repeat. … See you next Tuesday!”
The commenter was referring to the now-widespread trader theory that the U.S. Federal Reserve and Treasury have been and are “gunning” and then “shorting,” or betting on high-frequency-trading-orchestrated stock downturns, in order to herd investors into the government weekly Treasury bond sales while maintaining artificially low borrowing government interest rates in the face of ever-declining foreign investment in Treasury issues.
Tell me, would you loan a hundred billion dollars to the government for 10 years at 3 percent? Not if you had a choice. That’s why so many former creditors are not buying new bonds and not rolling over the ones they have.
Given that the events described have been happening with predictable regularity for months, the commenter might be simply stating the obvious rather than preaching some conspiracy theory. After all, the “rinse and repeat” action has become so regular that some traders are betting on it weekly and making millions doing it.
Is this so bad?
Since government borrowing is now financing the entire real estate industry, the entire banking system, most manufacturing (through military spending and auto bailouts), 8 million people on unemployment and more using food stamps, and the national debt will be equal to the GDP, or the total amount of spending by everyone and everything in the country including government, by February of next year, artificially low low Treasury borrowing rates and high demand for Treasuries as a “safe haven” from “market volatility” are the only difference between the USA and Greece.
Your retirement portfolio has certainly benefited if it is in the stock market. If the federal government has gunned the “recovery” in the markets, the resulting record-setting gain in equity index prices that has been achieved with almost no real trading volume effectively bailed out a lot of 301(k)s (if the market gets back to 14,000, they’ll be 401(k)s again if they’re sold before the game is over).
One should note that insider trades, which must be reported to the Securities and Exchange Commission, have averaged more than 30-1 selling-to-buying ratios since last summer and fall and reached 82-1 selling over buying in December. This simply means that people who own large amounts of stock in their own company have been fleeing their own stocks in droves while the high-frequency trading algos gunned up the price they could get their shares.
Is a market like this a place for our long-term life savings? For our retirement funds? If the stock market of today is nothing more than a private house-operated computer game, why would anyone place their own financial future in the hands of a rigged supercomputer version of video poker?
There’s evidently no limit on the amount of chicanery to be allowed in accounting-rule revisions to prevent a return of real estate value to pre-bubble historical multiples of income, or to the amount of money the Fed can print in order to prop up markets.
There is evidently no limit on the willingness of the Fed chairman to roll the presses as he bails out his associates in the banking class rather than letting the system “reboot” properly and commence again in the real world of price and demand. This type of mismanaged system will fail and reboot at some point; they always have.
The inevitable is simply being postponed while the last “wealth” is shuttled into the coffers of the least productive: Wall Street bankers and their personal politicians.
Simon Johnson wrote recently, “Outside of the inner White House-Capitol Hill bubble, it is very hard to find anyone well-informed about the financial system who thinks that anything substantial has changed or that risks will be better managed as we head into the next cycle. ‘Business as usual’ is the abiding legacy of the Obama administration with regard to the systemic risks posed by this financial system.”
“Business as usual” in these times of illusory markets and dishonest video-poker-machine trading should give us all pause to think about what’s to follow.
Bill Sepmeier lives off the grid on Sweetwater Creek.