Tuesday, April 1, 2014

Is The Stock Market Rigged?

60 Minutes had a show about the stock market being rigged.  It Interviewed Michael Lewis and he discovered that High-frequency trading (HFTwere front running the market by using direct feeds to capture buy and sell orders from Exchanges and would buy or sell ahead of a large order, forcing anyone to have to pay higher for a stock, because the HFT purchased the supply a head of them.  CNBC had Lewis on there show a couple days later and here was the snippet.


The debate centers around direct feeds and the SIP, Securities Information Processor .  Apparently HFT have direct feeds to the major exchanges and they can see market order before anyone else.  Where everyone else only sees orders on the SIP, which is 'slightly' slower.  So using computers, a HFT algorithm can see your order come in via the direct feeds, then buy up all the ask and sell it back to you for a grantee profit.

So are the markets rigged?  I say no.  The slight speed advantage that the direct feeds have over the SIP system is measured in milliseconds.  For a retail investor, they don't care about your tiny lot orders to buy 100-500 shares.  The HFT is really trying to get ahead of the large lot orders that Mutual funds and pension funds have to transact.  The 5000-100,000 share orders, where a one cent profit means $50-$1000.  Do this a few hundred times a day and you made some real money!

So don't worry about the current news story of the week.  The market has never been better.  Spreads are smaller and commissions are lower. So its easy to make a profit then ever before.   It is still tough to trade and make a profit, but that is the trading business.  Don't blame it on the system, blame it on your self.  Once you figure out the system, then you can make money.  I'm living proof.  Problem is that once everyone else figures out the system, the system changes, so you better learn to change with it.

If you are still concern about someone front running your order, then just route your order on the IEX Exchange.  They add 350 microseconds of latency to HFT, by adding a huge spool of fiber in-front of there computers, so the HFT orders arrive at the same time.  The CEO claims that after he setup his own exchange, he found that he could hit any bid price and it would execute, where before the orders would just disappear.

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