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 24, 2014 09:09 GMT

COIN TOSS-MAYOR

LIMA, Peru (AP) -- Usually, one flips a coin to determine things like who gets the ball first in a football game or who gets first dibs at the last slice of pie or something. But to settle an election? That's what happened in a small town high in the Peruvian Andes. Two candidates tied at the ballot box -- with each getting 236 votes in the municipal election. Peru's electoral law allows tie races to be decided by a coin toss. So the coin was tossed. And the winner -- Wilber Medina. His rival says he's cool with the results. It isn't known whether heads or tails carried the day -- and the election.

PUMPKINS-PIGS

SOMERSWORTH, N.H. (AP) -- It started as a potential case of pilfered pumpkins. But it turned out to be a windfall for a group of pigs. Foster's Daily Democrat in Somersworth, New Hampshire reports hundreds of pumpkins were reported stolen earlier week. The gourds had been set aside behind a school to be sold this weekend at a craft fair. The investigation didn't get far. Turns out a farmer spotted the pumpkins and asked a school worker if he could take them to feed his pigs. The school employee didn't know the pumpkins were being saved -- and the farmer took them. Police say the only ones that turned out happy in the whole episode -- are the hogs.

FIREWORKS-FUNERAL

SPRINGFIELD, Mo. (AP) -- When the fireworks burst in the air tomorrow night over Springfield, Missouri -- it won't be the Fourth of July -- but the last of James Carver. A Missouri funeral director will be bidding farewell to his dad -- by having his cremated remains mixed with fireworks -- and launched into the sky. Carver's father is the first to try the program by Greenlawn Funeral Homes. His son Jim is the funeral director -- and says the eight-minute fireworks display will be followed by a cookout and memorial celebration.

 
Advertise with us!

Should Health and Human Services Secretary Kathleen Sebelius resign or be asked to resign by the President because of problems with the rollout of healthcare.gov and health care reform?

Yes
No
I Don't Know



Poll Results

25.83% Yes
25.54% No
48.61% I Don't Know

Talkers