Watch FOX 17 News @ 9pm

Watch FOX 17 News @ 9pm

High Frequency Trading solution - 04/07/14

  I talked about HighFrequency Trading today on the air. Critics describe it as legal frontrunning. It would be illegal if it were done by humans. The fear is that if itgets out of hand, it could crash the stock market and put us back into arecession (at least).

  The way to fix it isfairly simple: make it too expensive to do it. But thats controversial becauseif the costs for conducting transactions were made more expensive for highfrequency traders, it would go up for the rest of us too.

  Heres the way highfrequency trading works. You put in an order with a financial advisor or with anonline broker to buy a stock, and the electronic signal goes from Wall Streetto the various exchanges where the transaction occurs, usually across the HudsonRiver into New Jersey. But before it gets to the exchanges, high frequencytraders put computers with fiber optic cables right in the path of thosesignals " and front run your trade.

  Following complexalgorithms that happen in fractions of a second, the computers will buy thestock you want and sell it to you at a slightly higher price than they boughtit so they make a very small profit. But they conduct these transactionsbillions of times a year, so the profits are enormous " and the increased costis picked up by you and me and anybody else who inadvertently trades with them.

  The reason its costeffective is because stocks trade by pennies now. That means the spread, thedifference between buying and selling a stock, can be so small that its measuredin pennies.  You might be able to sellyour stock for $49.97 and buy it for $50.00. That means theres only adifference " a spread " of 3 cents. Like the old joke " how do you make moneyon that? Volume.

  If you were to goback to forcing a spread of at least a nickel for each trade, the potential profitin each trade would practically go away. The stock market traded for years infractions: sixteenths, eighths, quarters, etc. A sixteenth of a point doesntsound like much, but its more than 6 cents. When the stock market startedpricing in pennies, that spread fell to one cent. (That doesnt mean that astock you buy or sell will have that small a spread, but in highly tradedstocks, it could.)

  Critics of thatsolution say the costs would go up for everybody, and that would be inherentlyunfair to all of us, whether individuals or institutional customers likepension funds investing for retirement.

  The JusticeDepartment, the FBI, Congress and the SEC are all investigating high frequencytrading now. There will be many solutions proposed, but taking away the profitmotive for high frequency traders will certainly be one of them.


Get This

Last Update on October 08, 2015 09:35 GMT


PAUL SMITHS, N.Y. (AP) -- It takes more than money to get a college named after you. A New York judge is blocking a name change for an upstate school. Paul Smith's College was to become Joan Weill-Paul Smith's College. The school's board of trustees voted over the summer to rename the college in exchange for a $20 million donation from Weill. She's the wife of Wall Street billionaire Sanford Weill. But alumni objected, saying it set a bad precedent. The judge, in rejecting the name change, cites the will of the founding donor.


HONOLULU (AP) -- Call it hump day in Hawaii - but not because it was a Wednesday. Officials say the first humpback whales of the year have been spotted in the waters off of Hawaii. Researchers sighted the first whale about a week ago. A second was spotted a few days later. Ships and boaters are being warned to steer clear of the endangered sea mammals. Humpbacks normally arrive in November and stay through May. The National Oceanic and Atmospheric Administration estimates about 10,000 humpbacks winter in Hawaii each year.


WACO, Texas (AP) -- That was no moose in Waco. A man reported a moose near the downtown area of the Texas city yesterday morning. Turns it was a bull elk that kept authorities on the run for hours. Police, game wardens and animal control officers finally captured the elk after it was hit by a tranquilizer dart. The bull elk was taken to a heard on a nearby ranch. It was estimated to be 2 years old and around 600 pounds. Officials are still stumped as to where the elk came from.


HOUSTON (AP) -- Fly happy! That's the aim of officials at Houston's Hobby Airport. Art work for the new international concourse is being chosen partly for the ability to help make travelers feel happier. Next to a ticket counter is Libbie Masterson's blue mirror-mosaic piece titled "Ethereal Sky." Travelers will walk past a "field" of colorful flowers and grasses printed on aluminum panels -- Krista Birnbaum's "Roadside Attraction." Houston airport system curator Tommy Gregory tells the Houston Chronicle the art is "meant to ease your transition."

Advertise with us!


Advertise with us!