That's exactly what I was thinking. When high frequency traders are doing it it's OK but when this guy tricks them into actually taking some risks it's fraud.
If that is the case, am I breaking the law if I just buy some shares and, during the phone call with my dealer, make a comment that I hope my share purchase drives the price up?
Why is it different? Because the law says it is.
And if it's not, why isn't it? Basically it's a double standard, because (most of) the markets are too cosy with HFT firms.
Most high frequency traders are trying to make money by providing liquidity, i.e. offering to buy and sell at a better price than the rest of the market. This benefits both the HFT (because they make money) and other market participants (because they can trade at lower spreads).
What these guys were doing was entering orders that they actively didn't want to trade, so that they could push around the price of the stock and repeatedly scalp a small profit. They had no intention of improving the quality of the market (either by narrowing spreads or improving price discovery). In fact they were actively making the market work less well, by impeding the process of price discovery with their "bluff" orders.
The whole point of a market is to be an efficient mechanism for matching buyers and sellers at a fair price. If someone is deliberately trying to distort the fair price, they are undermining the value of the market (and other market participants, not only HFTs, will suffer because their trades will no longer take place at the 'fair' price, but instead at the 'fair' price plus whatever direction the scalpers happen to be pushing it in at the moment).
I don't buy the "providing liquidity" defense of HFT.
http://blogs.wsj.com/moneybeat/2014/04/03/schwab-on-hft-grow...
So what. 99.9999999% of the pixels blatted onto your screen aren't looked at. Why do you care?
Let's say I'm making a market in a derivative product (A), one where the price is 'derived' from the price of another product (B). By a simple equation. Let's say A = 2 * B. No one likes product A. No one trades it. Lots of people trade B. All day long B moves around. B ticks up, I have to cancel my bid and offer on A and move them up 2 ticks (I do it quickly, cos I'm an evil HFT). B ticks down, I have to cancel my bid and offer on B and move it down 2 ticks. All day long I move my quotes. No one fucking trades. 100% of my orders are cancelled and replaced on a different price.
Why do you care?
A limit order is a limit order. It isn't doing anyone any harm by being there.
>Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days.
McDonalds are profitable on 100% of their trading days. Casinos are likely profitable on 99% of their trading days. If they weren't profitable they wouldn't be doing it. Market-makers like Virtu are more service providers than they are 'traders'. They are the middle men who allow others to trade and take risk, and extract a small fee for doing so. Here's a good analysis to read: http://blogs.wsj.com/moneybeat/2014/11/13/virtus-losing-day-...
The cheeseburger market is rigged.
However, thinking logically about the whole HFT business: As I understand it it's something like this:
Let's say I want to buy 100 apples at $1 a piece. A middle man comes and says: I see that you want to buy 100 apples. Let me buy them for you. Here they are (an apple is now $1.001)
Why do I need this middle man to steal from me? You will probably say that they are providing liquidity. It's still stealing and the markets had enough liquidity before the whole HFT gang came.
Maybe I'm wrong, if so please explain me why.
The HFT is your counter party. When you say you want to buy apples, you are buying them from the HFT. Like any reseller, they are hoping to have bought those apples at a cheaper price than what you want to buy them, because they are a profit making enterprise. Like any reseller, the service they are providing is being able to sell you those apples right now, when you want them. They have taken on the risk and expense of finding cheaper supplies of apples and held them for the appropriate time to sell them when the price was right.
Like any reseller, you do not have to buy directly from them and pay their mark up. You just need to invest the same energy and expense that they do on supply chain to be able to get apples at cheaper prices than people want to pay. Of course, you are probably not in the apple reselling business, so it might not make sense to do this.
And how does that compare to the pit trader order cancel rates HFT replaced?
> Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days
Are these same traders potentially working on an IPO deal? How about being acquired.
Lets put it this way, it is trivially easy to come up with a strategy that is profitable (also just FYI they mean the buy/sell made money, they dont count their operations cost in that) on 99% of days. Its that 1% that wipes out your whole company that is hard to avoid.