BERKO: High-frequency trading could lead to disaster
Dear Mr. Berko:
Would you please tell me what high-frequency trading is and how it works? An engineer friend of ours tells us that this kind of trading could hurt the stock market if left unchecked. Is our friend being an alarmist?
J.H., Elkhart, Ind.
Dear J.H.:
I think your friend may be underestimating the potential damage. High-frequency trading could crash the U.S. financial system entirely.
Goldman Sachs, Bank of America, Citigroup and dozens of other big banksters — most of the hedge funds on Barron’s Top 100 list and then some — Merrill Lynch, Oppenheimer, Morgan Stanley and dozens of heavily capitalized brokesters are all evil members of the High-Frequency Traders (HFT) Fraternity. They emerge from their coffins before the market opens and return after the market closes.
HFTs are responsible for the “flash crash” in May of this year, when the market plunged 900 points and then, in minutes, recovered 900 points. HFTs thrive on volatility and are in high cotton when they force the market to move 200 or 400 or 600 points a day while trading billions of shares between market opening and market closing.
The New York Stock Exchange (NYSE) makes it easy for these daywalkers to suck the blood from America’s pensions and financial system. Here’s why: When John Thain left Goldman Sachs to head the NYSE, he immediately demanded a trading platform that would provide more than 1 million quotes a second. Then he constructed a data center allowing HFTs to link their computers with the NYSE system. This permitted HFTs to have microsecond access to the NYSE computers, which in turn allowed HFTs to place thousands of trades per second for a gain of a few pennies a share.
Thus, Goldman Sachs’ machines may buy 2 million shares of Exxon Mobil at $71.18 and, in a fraction of a second, sell it at $71.23 — and net $100,000. In lockstep, Goldman’s computers will buy and sell millions of shares of CVS, Clorox, Motorola and Cisco and in microseconds make $100,000 to $1 million on each trade. While Goldman is doing this, so are the computers at Paulson’s Hedge Fund and so are the computers at Morgan Stanley, UBS, J.P. Morgan, etc.
There are no human decisions or interactions made in these trades. It’s all done mindlessly with computers that use sophisticated algorithms built to recognize patterns and anomalies while simultaneously processing the buy and sell sides of trade in nanoseconds. Goldman, Bank of America, the hedge funds, the brokesters and the supertraders use these machines to trade oil and currency futures, gold, corn, copper and so on, and in the process, they play havoc with the normal price movements dictated by supply and demand.
Machines don’t acknowledge fundamentals such as revenues, earnings or dividends or the fundamentals of the supply-and-demand equation. There’s no thinking, no thrill, no human decisions to make. The machine is as emotionless as a Swiss watch that steadfastly tells time and is unaffected by sounds, light, altitude, wealth or speed.
This is a frightening example of how the unfettered power of capitalism becomes self-destructive. High-frequency trading is a man-made cancer that renders useless all analytic research, balance sheet analysis, supply-demand paradigms, revenue and earnings predictions and the human equation. It frightens me greatly, because it has the power to destroy the pensions of millions of Americans and the future of democracy.
The Securities and Exchange Commission (SEC) should stop this immediately, but the SEC is overruled by a cadre of lobbyists with fistfuls of dollars who really control the organization. Like all other big-dollar schemes (Madoff, the Stanford Group and the municipal pension fund rip-offs by the big banks), the SEC gets involved only after the damage has been done.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775, or email him at mjberko@yahoo.com. © 2011 Creators.com