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Is high-frequency trading fair and safe?
Traders work on the floor of the New York Stock Exchange Sept. 18, 2008
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TEXT OF STORY
KAI RYSSDAL: A term has been popping up in the financial press more and more lately: High-frequency trading. Lots of buying and selling in micro-seconds. Speculation is that's one of the reasons Goldman Sachs posted such out-of-this world profits last quarter. Although Goldman does say, by the way, that high frequency trades made up less than 1% of its revenue the first half of the year. But there's no question the use of super-fast computers to make trades has been on the rise.
We asked Marketplace's Amy Scott looked into where that leaves small investors with regular computers.
Amy Scott: High frequency traders use computer programs to buy and sell stock extremely quickly. They can send out thousands of orders in the blink of an eye. It means there's almost always someone to trade with if you want to buy or sell a stock.
Jamie Selway: I like to think of them as the China of liquidity.
Jamie Selway is managing director of White Cap Trading. Liquidity refers that ability to buy or a sell easily. Selway says, just as China's low costs make some goods cheaper...high frequency firms make trading cheaper.
Selway: On the flip side, maybe these cheaper providers take jobs. Or maybe these cheaper providers put melamine in baby formula or lead in paint on toys.
Selway doesn't think high speed traders are that toxic. But critics say the firms are notoriously secretive. And their lightning fast trades can leave slower investors...like maybe your mutual fund provider...out in the cold.
Analysts say high frequency firms represent anywhere from 40 to 70 percent of trading on a given day.
James Angel teaches finance at Georgetown University. He says that leaves the market at risk of a high-tech meltdown.
James Angel: The danger is, what if these computers misfire, so that suddenly something goes haywire. Unfortunately, our markets lack a shock absorber to protect us in that situation.
The risks have caught the attention of regulators. The SEC is looking into the potential dangers.
In New York, I'm Amy Scott for Marketplace.
The whole issue of the advantages of instant trades would be moot if we had a capital gains tax structure which rewarded only long term gains. Capital gains realized in less than six months should be taxed at 95%, sliding to zero at 20 years. There would then be very little advantage to rushed trades
I was very disappointed in this story. I realize that you only have a limited amount of time for these stories, but I'm afraid this time, you ended up missing the point entirely. There are 3 specific strategies that high frequency traders are employing to fleece ordinary investors. While not hard to comprehend in the abstract, they do depend on a detailed understanding of how electronic trading works. These techniques are highlighted in a recent white paper from Themis Trading. The link to the white paper is: http://www.themistrading.com/article_files/0000/0348/Toxic_Equity_Tradin.... These abuses and the link to the white paper were highlighted in John Mauldin's popular weekly column, published on 11-Jul. See www.frontlinethoughts.com.
