All it takes in today’s world is one prominent writer (Michael Lewis) to write a book, accuse a piece of the finance industry of “rigging” the market yet again and two days later the next headline is “US Justice Department Investigates High Frequency Trading”. But what is wrong with high frequency trading and why are we all so concerned about it now?

While Lewis makes claims that high frequency trading is utter evil most market experts understand that most things that are painted as black or white are normally somewhere in the gray area. Another words, high frequency trading is a lot more complex than most think and it takes learned individuals to understand it and be able to police it. Unfortunately as we have done in our society for far too long someone screams from the roof tops about an issue that the rest of the establishment is geared up to understand. Most especially our regulators have been tasked with trying to investigate a whole new style of trading that their own technology and investigative tools may not be as advanced to track. So we are asking them to do their jobs in the dark and didn’t even provide a flashlight.

The fundamental question most are asking is high frequency trading good or bad? Here again, the answer is not as simple as you would like it. It is a complex analysis of the utilization of market fragmentation in a way to create investment returns but how high frequency trading goes about doing this is at question. The trading isn’t actually the issue, as trading in out of stocks and bonds in a fast quantitative way are nothing new to anyone. What is new is the way in which the information flow is gathered and utilized.

The first focus on this type of trading should be taken into context of how information flows as a whole in an ever-expanding system in our markets. In a recent paper released on The Review of Financial Studies the concept of “time” is discussed as it relates to the trading world. Where the average ETF can make 100 to several hundred trades in a day a high frequency trading strategy can make 100 trades in a second. This does add liquidity and versatility to the market. The study expands the concept of the difference in time to long term investing. An ETF cares about earnings data and fundamentals where high frequency trading focuses on fast data or data about trading itself. Not about the fundamentals of the company that is being traded. By receiving this data as fast as possible high frequency trading strategies have an “edge” because the system then can make determinations about price movements, order flow and market effectiveness. There is nothing inherently wrong or illegal with that concept.

Now how that information is obtained and whether or not that information is what we know to be “inside information” is the major question. Getting information that is public first is not inherently illegal and to paint high frequency trading strategies with a broad brush that all of it is bad is just not proper or fair. However, as there will always be bad actors in any market, the way in which the concept of high frequency trading works in and of itself opens the door for abuses of the system. These abuses give high frequency traders an ability to abuse the system to show they have an edge.

High frequency trading platforms can practically make or break a market by the sheer nature of their speed and that is something that regulators have to look into. Because of their speed of execution it is possible for them to do what is called “order stuffing” which means bombarding the electronic trading systems with so many orders in rapid succession that they will get the first executed trades out of a batch of orders. That kind of use of the system sounds incorrect and something that should not be a legal use of the rapid trading concept as it was with mutual fund timing.

The quandary becomes catching these platforms and prosecuting the bad actor behavior and why our regulators need more advanced tools in order to be able to spot these anomalies. Since the actual usage of this can be hard to spot or police it makes it that much harder for regulators to enforce the proper usage of trading rules in high frequency trades as the tacking tools are slower than the actual systems doing the trading. The unknown here is what if any systemic risk there is to the financial system that has allowed the usage of such strategies to find market inefficiencies and exploit them. While the abuses of the system need to be curtailed and the actual source of the information revealed for review, not allowing higher speed access and trading would take us back to the debate over SOES trading and online brokerage. Wall Street proper would of course like us all to do away with low margin trades and $9.00 commissions on line. Those banks make more money if we all have to depend on their execution and higher fees.

Abuses of the system do need to be curtailed but all high frequency trading platforms and/or traders are not bad. That is like saying all gas stations are bad because one station in your town is manipulating the pumps so that you pay more or get less gas for the same money. Does that bad operator need to be removed from the market and the law enforced, most definitely. But we do not want to remove a style of trading that has been profitable just because the banks that we all bailed out because they were determined to be too big to fail do not want anyone else playing in their sand box.

 

 

 

 

 

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When we were young we all got our drivers licenses and set out to achieve one of the first rungs up the ladder of The American Dream, car ownership. Most of us started out driving a hand me down from a family member or our parent’s cars. If we wanted a car we had to work for it or better yet buy it on our own. The most important part of this lesson in life was that if you worked hard enough you too could buy a car. A car represented freedom for most people. A car allowed us to have the ability to take a drive along the coast, visit friends or to go out at any time and get something. Cars became for most Americans the quintessential social status.

The same does not hold true today unfortunately. While cars still represent the ultimate independence for any and all teenagers who just got their licenses want a car, car prices are rising while salaries are staying stagnant. The average price of a new car rose in the aftermath of the Great Recession.

According to a recent report conducted in part by professors at Cornell University the basic economic facts of the recovery are plain to see. The top tier of Americans have done very well in the economic recovery while the average American is in worse shape economically. The desire for car ownership still exists but the study points out that this is a goal a lot of individuals find unattainable in today’s economic reality. As much as twenty five percent (25%) of the average families in major cities can no longer afford a new car. New drivers are buying less expensive new and used cars that do not hold their value as much and may not have as decent warranties.

Economic experts state that the average American in today’s economic climate has little to no disposable income when you factor in housing costs including the borrowing costs well saving for education. As we stated in our last article on the ever-growing debt crisis here in America, many people are lured by decent financing or lease rates when it comes to cars. This takes a bad economic issue and makes it that much worse. Buyers who have no business borrowing such numbers for a car that is too expensive for them do so to look better in the community or to feel better in what are still difficult economic times for the average American.

Borrowers who have credit problems are also forced to pay even more for their next car since they are still reeling from the economic impact of the financial crisis and cannot purchase a car outright. When looked at in a side-by-side comparison the borrower with the worse credit pays much more for the same car making the financial impact on the already risky borrower even greater. As Ribotsky Institute recently stated many economists warn we are headed for an automobile financing bubble not unlike the subprime mortgage crisis. If such a situation came to pass borrowers could see their cars disappear in value and so too would their ability to get to work, feed their children or live the most basic parts of their lives.

What will happen to the American car manufacturers if an auto-financing crisis occurs? What would happen to the banks that originated and/or securitized the paper backing the auto loans? One thing is for certain values on the companies that produce these cars would plummet if they were left with massive inventory no one could sell or finance. Additionally the value of the cars that we have all purchased would change creating issues in current loans, refinancing and resale of used cars off lease. Those issues would severely impact the automobile industry and the banks who finance cars through leases and purchases.

Real economic planning is imperative to avoid further financial turmoil for all Americans. While our economic survival is global in scale our problems start right here at home.

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Debtor Nation

March 17, 2014

In our focus on the ever-increasing debt here in The United States one major facet of our society cannot be overlooked. Personal Debt. Unfortunately as a nation we have one of the highest per capita personal debt structures in the world. Americans are borrowing more and more and the debt load they are carrying is […]

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$100 Trillion and counting…

March 9, 2014

Do not adjust your screen you read correctly. One Hundred Trillion Dollars. That is the approximate amount of debt in the global debt market as of the end of last year according to a new very detailed report. The report done by the Bank of International Settlements, which is essentially a central bank to all […]

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Lions, Tigers and BEARS, oh my…

February 25, 2014

As even Dorothy would say “I don’t think we’re in Kansas anymore…”. While she was certainly right about her own situation in the wonderful tale of The Wizard of Oz, so is it true when referring to stock market. The market has been showing signs of stellar heights and difficulties all at the same time. […]

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The Solution is Worse than the Problem

February 14, 2014

If you remember back several years ago to the Great Recession as it is called, you remember the bailouts and the daily drama we all faced as we watched the world implode on itself financially. The United States Government came up with multiple programs as well as new regulations to attempt to curtail what had […]

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The Wireless World – Addicted to Social Media.

February 9, 2014

If have ever been to Walt Disney World there is an older attraction in Tomorrow Land, called the Carousel of Progress. In this ride you sit in a movie theater style seat and are treated to the progress of technological change over the years. The ride is somewhat outdated at this point but the idea […]

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They have a charmed life, or do they……..

February 7, 2014

What has our society become that in today’s day and age we refer to the death of someone from drugs as an “overdose”. It would seem we are saying that all would have been ok, had they taken the right amount. But that would not be a true statement would it? Because the truth of […]

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Is Financial Turmoil Once again Inevitable?

February 2, 2014

  The is an old wife’s tail or Wall Street proverb that states, “As January goes, so goes the rest of the year…” This January has shown signs of volatility throughout markets that have left the Dow Jones Industrial Average down a bit over five percent (5%) for the start of 2014. Some traders have […]

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The State of Our Union. But we must be in different Unions…….

January 30, 2014

President Barack Obama gave his fifth State of the Union Address on national television Tuesday evening. The speech, some called a Hail Mary pass seems to have had little effect on the President’s approval ratings, which are currently the lowest in his tenure as President. The President outlined his strategy that is termed “opportunity for […]

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