This computer-based high-speed trading uses complex algorithms to move in and out of positions in fractions of a second.
These HFTs give the big guys an edge that the little guys cannot compete with, says Michael Lewis, the famed Wall Street author in a new interview on “60 Minutes” to be aired on Sunday, March 30th at 7 p.m. Eastern. CBSNews.com announced the appearance and provided a synopsis of his comments.
“High frequency traders have found ways to use their speed to gain an advantage that few understand,” says Lewis in the interview.
“They’re able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price,” says Lewis. “The speed advantage that the faster traders have is milliseconds…fractions of milliseconds.”
High-frequency trading has garnered attention recently after the New York Attorney General Eric Schneideman spoke out about the “unfair advantages” of HFTs over regular investors and Goldman Sachs Group Inc. President Gary Cohn wrote an op-ed in The Wall Street Journal about the “responsible way to rein in super-fast trading.”
Schneideman said U.S. exchanges should not allow traders to obtain pricing information fractions of a second earlier through technology, giving them an edge.
Cohn, a former trader, pointed to creating “stronger safety net of controls”, incentives towards reducing market instability, making sure market data is disseminated to all market participants at the same time and giving clearing members more tools to limit risk.
The argument to the contra could be as follows, “ buy them in front of you and sell them back to you at a higher price,” - I wonder if he has ever heard of a limit order. Put your small order to buy below the price, or your small order to sell above the price. Your order may very well be aggregrated into these larger, high speed trades by your broker or some intermediate exchange. We absolutely need the liquidity, and order fulfillment that high speed trading provides. You could not satisfy the trading volume with slower speeds. And another thing, small investors don't generally trade in and out of 10,000 shares in a few minutes for a 2 cent gain. That is not where we belong. In any case retailers are a slow dying breed in many of the exchanges.