Used to be called "churning"? : Stock Traders Find Speed Pays, in Milliseconds

[Fumesucker]

http://www.nytimes.com/2009/07/24/business/24trading.html?_r=2&partner=rss&emc=rss

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

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More at link..

ISTR this practice used to be called "churning" and was quite illegal..

[seeviewonder]

1. I work in the industry as a registered rep.

and I thought the same thing when I read the story earlier this morning. I think it fits the definition of "churning" fairly well. I wonder how they can get around it?

[Sal Minella]

2. But it's a machine doing this, not people.

And I'm sure the Wall Street guys have no idea how to stop this machine. The Wall Street Guys will say "the regulators" ought to be regulating this machine. The WS guys themselves are powerless. People outside Wall Street just aren't capable of understanding the Great Mysteries of How Wall Street works. /sarcasm.

[notesdev]

3. I think "churning" is something else

"churning" as I understand it is making repeated trades unnecessarily in order to generate per-trade commissions.

What goes on in HFT is a lot of front-running (which is illegal) as well as the ability to screw with trading rules in ways that could not possibly be done by humans alone.


Let's say I have a stock that I want to buy 100 shares. I'm willing to buy them at any price up to $10.00 each, but the market price is $9.00.

So I do a normal trade with the parameters, let me buy the first 100 shares available at or below my target price ($10).

What HFT can do to me then is to basically discover my maximum buy price and drive the transaction to sell to me at the highest price possible. Even though a human could not in any reasonably time discover that price, a computer can in a virtual instant; it will sell one share at $9.00, another at $9.05, another at $9.10, and so on up to the point where it finds my maximum price of $10. It will then dump onto me the rest of the unfulfilled shares in my order... so if it took 20 steps to get there, I then get the last 80 shares of my order at the maximum possible price, rather than the significantly lower market prices I would be paying in the absence of HFT.

In other words, these guys are doing the same trick described in the movie Office Space, clipping a little bit of value out of every transaction whether you like it or not.

[seeviewonder]

5. You make a good point about the front running...

I do think that what they are doing could be considered as churning, though, depending on who they are actually working for. If they are working for a B/D, then they could probably be found guilty of churning as well (although it would be indirectly). Do you work in the industry as well?

[notesdev]

8. Nope

Don't work in the financial industry, I'm in IT. But after getting stolen from left and right from these guys I finally figured out the game and I am NOT happy about it. These guys are basically in the business of using our own money as a means to steal even more money.

[seeviewonder]

9. I understand where you are coming from.

Not all of us are as greedy as other reps in the industry. I would love to have more regulation in the markets, personally. I think it would weed out the bad ones one way or another.

[notesdev]

10. big discussion about HFT

going on at http://market-ticker.org/

[sam sarrha]

4. we need a new tax on Wall street, a "No Value Added Tax" of 99.8% on all stock trades where the

transaction could not ad value to the te stock.. aimed at speculators that loot the system and the stock holders , especially Main Street..

[Turbineguy]

6. Back in the days when it was still legal...

a friend of mine inherited $800,000. He was a minor and the money was held by the trust department in the B of A. Through churning they brought it down to the more manageable amount of $80,000 while collecting some nice management fees.

[Fumesucker]

7. Eh, he probably just would have wasted it all anyway..

Better it go to someone responsible.. Right?