Do High-Speed Algo Traders Have an Unfair Advantage?

Have you heard of high-speed algo trading?  Well I hadn’t until I read the following article by Rick Ackerman.  Sounds a bit like sniping software used on Ebay.  It outbids the highest bidder right at the last second.  Unless you’re bidding against someone else with the same type of software, you will win the bid.  Many people think it’s cheating.

Sounds like many people think algo trading is cheating too.  It sounds like it gives the trader using it an unfair advantage as well.  The SEC is taking a look at it.  We’ll see what they think.  Check out Rick’s article and see what you think.  Leave a comment and let me know… should it be legal?

A story last week in the Wall Street Journal provided a fascinating glimpse into the world of high-speed, or “algo,” trading.  Who knew there was something called a “Hide Not Slide” order lurking in the murky shadows of  electronic trading?  Although this particular type of transaction might be difficult for the layman to understand, suffice it to say that it electronically hides or exposes bids and offers as needed with the skill of a three-card Monte hustler. The regulators supposedly are looking into algo trading because they suspect it might enable some traders to take unfair advantage of others. That would be putting it charitably – so much so that it is predictable that the SEC will detect a stench wherever they poke their noses, since it’ll be like sniffing out political corruption in Chicago during the Roaring Twenties. In the meantime, the Journal’s report on the probe in its early stages turned up stories that verged on the lurid, including one about a firm that advertised itself as a haven for big investors worried about getting picked off by algo traders. Turns out the firm, Pipeline Trading Systems, had an algo operation of its own called Milstream.

More than being merely suspicious about the way today’s electronic markets work is the BBC’s Max Keiser, a world-class muckraker who can smell financial scat a mile away.  In an interview we did with Max on Monday that will be linked here later this week, the discussion concerned some of the ways in which technological wizardry has helped tilt the playing field in favor of the trading world’s “one percent” elite. It may also turn out to have destabilized the markets so that a global flash crash is possible…

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