The SEC/CFTC held a joint hearing last week to hear from high speed traders and regular traders about what happened on May 6.
We haven’t listened to the whole panel yet, but this article in the Wall Street Journal basically described it as a whine fest.
The traders dubbed the “conventional” guys used the hearing as an opportunity to complain to the panel that the high speed guys are playing the game unfairly.
They’re jumping in front of our trades, they’re front-running us, and it’s unfair, they told the SEC and CFTC.
The high speed guys pointed the finger right back at them and said their critics spread false rumours about how they trade.
But the complaints about the high speed guys are more serious.
“Short-term traders are able to get an instantaneous glimpse into the future,” (through direct feeds to exchange data) Jeff Engelberg, a trader at Southeastern Asset Management told the panel.
He said it turns the market into “something nearer to a casino.”
Engelberg’s firm, Southeastern, is a value-investing firm. The theory is that high speed computers are able to “detect” when long-term investors and mutual funds are about to place large orders in the market. Then they immediately buy up shares of that stock before the large order goes through.
Once the firm’s large buy order is processed, the stock price should go up, and the high speed guys, short-term buyers by nature, will sell and make a quick profit.
“They front-run us,” said Phillip Krauss, head of stock trading at Chicago’s Harris Investment Management.
According to the Wall Street Journal, Bank of America is already using/developing new technology to combat this so-called “gaming.”
Our take: that’s what should happen. Fight firey new technology with firey newer technology. Stop whining, and just find a way to win out in the long-run.
This point in the WSJ makes sense:
In many ways, the gaming dynamic isn’t new but instead represents an evolution of the market. Wall Street insiders have always tried to use information about competitors’ intentions to gain an edge.