Does High Frequency Trading = Front Running?
It is becoming hard not to laugh at any news reporting the cause of stock market movements. It is now estimated that over 70% of the daily volume of stock trades are computerized High Frequency Trades (“HFT”). HFT is extremely sophisticated algorithmic trading where super-tuned servers are co-located (placed physically next to) the electronic exchanges (for a fee), and participate in a day-trading high-tech battle. This technology war pits computer combatants (algorithms) against one another while they both feast upon retail market participants.
All those talking heads on TV at the NYSE—explaining large moves because of European debt? All for show, simply marketing and a place for people to visit and news reporters to talk. All the real action takes place in huge lights-out data centers in New Jersey. It is really questionable whether any news reporter has any idea why the algorithms do what they do, or when they do it, as the software is closely guarded as trade secrets.
So next time you hear that the market moved this way or that because of an event in Europe; think again. No one really knows why anything moves in the market anymore because it happens literally at light speed, and only the computerized robot traders know what happened, and unfortunately value had nothing to do with it.
The algorithms function on trends and patterns, and company performance and executive conduct are not part of the equation; all positions are closed out every night. If this doesn’t scare the retail market participants then it probably should, for as Bobby Jones once said of Jack Nicklaus, “he is playing a sport (golf) with which I am not familiar.” The HFT traders are truly not playing the same game as retail “buy and hold” investors. The market has become a “Black Box” and it looks as though it is going to stay that way.
Mark G Capolupo