High-Frequency Trading, Brokerages, And Exchanges: A Love Triangle

Discussion in 'Stock Market Forum' started by PaulSchinider, Apr 8, 2014.

  1. PaulSchinider

    PaulSchinider Well-Known Member

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    Stocks of brokerages and exchanges slumped Friday after the US Justice Department said it was investigating high frequency trading for illegal practices

    TD Ameritrade Holding Corp. (AMTD), Charles Schwab Corp. (SCHW), and E*Trade Financial Corp. (ETFC) saw their share prices slide 4.22%, 4.82%, and 7.83%, respectively, on Friday, following fears of a ban on high frequency-trading and related practices. High frequency trading, or payment-for-order-flow deals, have helped brokerages earn millions of dollars in annual revenues.

    Brokerages have been benefiting from high-frequency trading by selling orders to middlemen who use high-speed strategies to create payment-for-order-flow arrangements. Discount brokerages have been selling most of the orders they receive from clients to wholesale companies. Wholesale companies then trade against orders received from discount brokerages without sending these orders directly to stock exchanges.

    According to analysts’ estimates, discount brokerages generate hundreds of millions in revenues from this practice annually; E*Trade generates about $92.5 million; Charles Schwab makes $100 million; and TD Ameritrade generates around $227 million annually.

    Charles Schwab, the largest discount brokerage in the US based on market capitalization, has however tried to distance itself from high-speed trading. Company Chairman, Charles Schwab, and CEO, Walter Bettinger II, said in a letter last week: “High-frequency trading is a growing cancer that needs to be addressed.”

    Last Monday, the Federal Bureau of Investigation (FBI) confirmed it had been investigating a wide range of activities conducted by high-frequency traders for months. The FBI is investigating the case as part of the bureau’s ongoing probe into insider trading. The agency is also looking into the possibility of high-frequency traders front-running retail investors who do not have access to sophisticated computers.
     
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  2. wanderingwildman

    wanderingwildman Well-Known Member

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    I am actually glad to see they are finally cutting back on this. It seems like just a logical place for thieves to play tricks on the numbers. I hope that they do enforce the ban on high frequency trading. I do apologize if this costs anyone here money.
     
  3. yossup

    yossup Member

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    Good. We've known about this for a while now but hopefully Michael Lewis' book can shed some more light on this serious issue. I'm so sick of seeing the market as a playing ground for nerds rather than as a legitimate place to buy and invest in promising companies, like a stock market should look like.
     
  4. HeinrichM

    HeinrichM Active Member

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    The results of the investigation should be interesting. A lot of companies have made huge profits due to high speed trading. Personally I do not think that it should be allowed. There are too many grey areas with high speed trading and the possibility of abuse.
     
  5. JR Ewing

    JR Ewing Super Moderator Staff Member

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    If you are a more traditional small investor, hft has virtually no impact on you. Of course it does have more impact on larger investors, funds, and institutions buying and selling larger blocks of shares.

    And it also greatly impacts human traders big and small who do large numbers of transactions each day and often liquidate their entire portfolios each day. The small time trader who is already paying a hefty % of his principal in transaction costs is hit even harder by the added markup / markdown on each trade. And the larger trader is paying a large amount in markup / markdown on each transaction.

    But the possibility that the HFT systems are perhaps getting special treatment from certain exchanges is disturbing. They should not be allowed to put in orders that they won't actually have filled, for instance. And there's also the possibility (however small) of systemic meltdown due to tech glitches or whatever - like a "flash crash", but worse - that is a scary thought.
     
  6. PaulSchinider

    PaulSchinider Well-Known Member

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    It is a positive step in market to make market goes very fast
     

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