Scientific Proof… Puts Market Fairness Under Question | zero hedge

Dodd-Frank Wall Street Reform and Consumer Protection Act, the study referenced by Zero Hedge, Goldman Sachs settling their famous fraud case with the SEC, the way major legislation is passed in Congress these days, and many more little pieces of information we call news all combine into a very unsettling view of today’s financial markets.  I’m focusing on just a few in this article because more could be a book.

Conspiracies Abound

Conspiracies abound, or we think they do.  Not that questioning authority is always a bad thing but sometimes what the retail trader intuitive knows takes forever to filter into the realm of government regulators.  And then, when the flaws of an existing regulatory atmosphere becomes apparent we only have to follow the money to see why things don’t get fixed in a timely manner.  Either the system can’t be fixed or the forces that should do the fixing is corrupt.

Every day I see evidence in trading patterns that point towards a corrupt regulatory system.  It didn’t happen in the mid-nineties near as much as it does today.  Usually when it did happen back then the SEC clamped down on the players and some even went to jail or paid huge fines.  Hugh is sort of a misnomer here.  They were large enough to stop what was happening but rather large enough for the players to look for another way around the regulations that required them to play fairly in the market.

What’s Happening?

An Example of Unfair, Proprietary High Frequency Trading.

In the past I felt confident that when I placed a limit order for a security that if the price dropped below the limit my order would get filled.  Not anymore.  What I see happening now is that even when other orders are filled at my limit, my orders don’t get filled even though the last order transacted was below my limit.  Instead, orders that are sometimes a 10 thousands of a point higher gets filled higher than my limit before my orders get filled.  This is where  the conspiracy comes in.  As a retail stock trader I can’t even place an order with a price of less than a penny.  So when I place an limit order for something priced at, say, $20.00 and the ask drops to $19.99 and then jumps to $20.0001 I don’t get filled, even at my limit price.

Sometimes this can mean a lot of effort and a lot of time for me to chase a “good” entry point.  And sometimes this means a lot of money.  A lot of money!  Lost or made doesn’t matter.  It could be either way. The point is that this kind of trading was regulated as unfair in the 90′s and now are supported by a wink and a nod in the New Millennium.   Obviously the published price doesn’t mean anything to some traders (HFTs as an example) or to any regulators.  This is where the conspiracy comes in.

In the first of two articles referenced below by Zemanta you’ll first notice that regulatory action and, indeed, the responsibility to formulate regulations are placed are squarely placed into the hands of the same regulatory agency that allowed these things to happen in the first place.   Also, you must notice that it didn’t happen overnight.

In the second article you’ll get a more indepth breakdown as to what Zero Hedge is talking about.  The key phrase in that article is “… a market structure which is increasingly becoming a product of the actual trading mechanism.”  This is not a fair market if the actual trading mechanism is played as proprietary as currently displayed by the example above.

Several other articles are included but so that you might flush out your education on how these things affect everyone including those with 401k’s and other retirement accounts.

Renewed Understanding

Once you understand the situation it becomes clear to me that what is really needed is a nationally published price and order flows that all traders must abide by and have access to.  If everyone could only buy by the penny and in the order the orders come in there would be fewer HFTs and far less distrust of the market structure than there is now.

Will it happen?  Someday.  But not if there really is a conspiracy and, by fiat, not any time soon.

Take-away or Taking Away

So what should be the take-away from the Dodd-Frank Act soon to be signed by the President and enacted above objections of nearly half (I’ll leave it to you, which half) of Congress?

• Small retail traders are on their own and must adapt accordingly
• Successful adaptation will include overcoming HFTs sactioned by the government
• The government is not trying to make markets fair but to extend their control over every facet of financing
• The government will increasingly exert control over everyone’s finances down to the individual personal finances.
• Nothing will be solved by it and the problems arising from it will only show up after the bill is approved

the author finds ample evidence that during the past decade (on the NASDAQ) and especially since the 2005 revision of Reg NMS (on the NYSE), stock trading increasingly demonstrates “self similar” fractal patterns, resulting in volatility surges, recursive feedback loops, and a market structure which is increasingly becoming a product of the actual trading mechanism.

via Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under Question | zero hedge.

Related articles by Zemanta

• A New World Begins for Wall Street Oversight (dealbook.blogs.nytimes.com)
• Quant-ifying the HFT effect in stock movements (ftalphaville.ft.com)
• The High Frequency Trading Scam (seekingalpha.com)
• Hedge Funds To Boost Use Of Trading Algorithms For Stocks, Tabb Group Says (huffingtonpost.com)
• Run on the Shadow Liquidity System (paul.kedrosky.com)

Tagged as: Business, Goldman Sachs, investing, Order (exchange), Regulation NMS, SEC, Stock trader, Zero Hedge