By Bill Broich
A recent 60 Minutes report hosted by Steve Kroft examined how stock trading has been hedged by insiders and allowing them a huge advantage in buying and selling stocks. The article examines how insider’s learned of trades just milliseconds before the actual trade was received by the trading floor. This is about computers talking to computers and knowing how to receive the information first. The process is known in the trade as “High Frequency Trading.”
It works this way: An order is placed by computer; the order is routed via the internet to the floor for execution. These insider’s figured out how to jump in front of the trade and increase the actual costs of the stock. If a stock was offered for $10 and a trade executed, the insiders computers would beat them to the order and increase it by 1 to 2 cents. Times those pennies by millions of trades and you have an enormous cash cow.
And guess what? It is not illegal, it is about who has the better technology. Fortunately a very observant trader at RBC noticed the discrepancy and did the research. He then calculated a faster way to execute a trade and beat the alien computer to the trading floor. Now many other companies are using his system and are able to make their desired trade at the original agreed upon price.
The issue is very simple, those of us who are mom and pop investors have no clue what really goes on, nor do we have any way of competing. Why isn’t the SEC or the stock exchanges themselves helping to stop this practice? That would be a good question to have answered. Possibly that sort of “dark” behavior is why 60% of Americans do not trust the stock exchanges, we are always folks who are clueless about the ruthless abandon of the greedy insiders.
Michael Lewis has written a book about the entire process, “Flash Boys”, the 60 Minute story is also linked below.