Joe Saluzzi of Themis Trading (I mistakenly read the link initially as ‘the mistrading’!) have recently published a paper which accuses traders of intentionally trading huge volumes where they buy and sell for the same price and in the process make a half a cent per share. The volume of trading is fictitious ‘high frequency traders’, what they do is buy and sell and collect liquidity rebates from the exchange (note: 50 milliseconds is a huge amount of time) in this game. Do it 8 billion times and it really starts to add up.
This is just depressing, actual investors don’t get to join in because the firms engaged in this are doing it within the actual exchanges using the fastest computer technology available. They also have an unfair advantage in how they trade because they use rules intended to match buyers and sellers to their advantage, they find hidden liquidity and in essence remove it from the market as profit.
The most powerful deterrent would be to make a rule whereby trades have to be in good standing for a full second, that’s right, 1 second would do away with almost all of this.
The clip below on Bloomberg is supplimentary to the 5 page report which is a fascinating insight into the inner workings of an exchange.
Now I understand why the likes of Goldman Sachs went after the person who stole their computer code with such vehemence, the issue with ‘algo’ trading is that the volume is not truly there, it is instead ‘presented’ as being there but not actually executing and the algorithm trader makes money on that basis.