Tuesday, July 28, 2009

High Frequency Trading: Specialists on Steroids

A Bloomberg article today on high-frequency trading begins as follows:
Frank Troise, the head of electronic equity trading products at Barclays Plc, says using computers to execute orders in milliseconds is no different than brokers jockeying for position years ago on the floor of the New York Stock Exchange.

“This has been going on for quite awhile, and it’s now at a fever pitch,” says Troise, 43, who is based in New York. “There’s always been an advantage to executing with speed.”
Bloomberg was raked over the coals for this in The Audit for "stating the obvious," but I don't think that my friends there understand the irony of what Troise is saying.

It's certainly true that it's been going on for a while, and that there has been an advantage to executing with speed. Why? Because of the part of the equation that Bloomberg left out, which was covered by the New York Times the other day:

While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In other words, the high-speed traders are able to engage in the sophisticated semi- (and sometimes outright) frontrunning that stock exchange specialists have been doing since the gaslight era. used to do until last year (see comment section).

As with the (former practice of) the specialists, it's all perfectly legal, very much money being made the Wall Street Way.

© 2009 Gary Weiss. All rights reserved.

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