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Study finds small investors losing out to computers

A trader works on the floor of the New York Stock Exchange on November 28, 2012 in New York City.

A new study concludes that high-speed computer trading is hurting average investors.

Ever since the stock market's so-called Flash Crash back in 2010, critics have accused high-frequency traders of harming the markets. One concern has been that the sophisticated computer algorithms were picking off vulnerable little-guy investors -- and the new study seems to back that up.

The report finds that even big institutional traders, from brokerages to pension funds, are taking a hit, but retail investors are losing the most. In one popular trading arena, contracts based on the future value of the S&P 500, small traders are losing an average of $5.05 per trade -- which then gets multiplied over millions of transactions.

The paper, written by Andrei Kirilenko, chief economist of the Commodity Futures Trading Commission, University of Washington finance professor Jonathan Brogaard and Matthew Baron, an economics graduate student at Princeton University, isn't the last word on the subject.

Other experts say the cost needs to be weigh against the benefit of competition between high-frequency traders, which has actually helped lower trading costs for smaller investors.
 
Still, the conclusions are sure to fuel concerns over blink-of-an-eye stock trading, which has come under intense scrutiny from the likes of Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke. After a closed-door meeting this summer, the regulators voiced worries about the risk of "unintended errors cascading through the financial system."

High-frequency trading from Marketplace on Vimeo.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.
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High Frequency Trading has been causing havoc for years in the financial markets. People like Carl Weiss a High Frequency Trading expert have been trying to come up with ways to combat it.Thankfully now at least the HFT's and their bots can be tracked in real time by anyone.Have a look at the way the bots were in action a few weeks ago during the US Presidential election courtesy of Carl Weiss from sceeto http://www.sceeto.com http://youtu.be/N1ouo0aeO7o
As you know High Frequency Trading and these type of algos as a matter of fact are responsible these days for more than 70 to 80% of all the daily US volume. hfts have been quote stuffing, i.e placing massive buy sell orders within milliseconds for a long time now. sceeto is one of the first small companies anywhere in the world that tracks the hft's in real time across various markets. Have a look for yourself ,Carl Weiss has done numerous videos on these algos. http://www.sceeto.com The chief software developer of sceeto he has for a decade tested to come up with software designed a system to sniff these out and try to at least again level the playing field a bit for the ordinary investor.

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