If you missed 60 Minutes last Sunday, you missed some very important information. The writer, Michael Lewis was interviewed about his new book, Flash Boys. This is a journalistic piece on our contemporary stock market. It is very bad news. I hope that you are sitting down. The stock market is a great place to grow your money. Some say you can make a million, if you start out with millions.
There have been numerous scandals concerning the market from "pools," front-running, bait and switch, pump & dump to the recent financial crisis where bets where made against the CDS of the housing assets in tranches, while at the same time agents of the same company were telling investors to buy these monetized debts.
It seems that the new rip-off is the best one yet. You want to buy Apple. You type your order on your computer or maybe you call your broker. The order is placed at the price you see on your screen. A few minutes later, you get a transaction report. Lo and behold! You do not get the price that you saw on your screen. You paid a few cents higher. You may call your online broker or your live broker for an explanation. You will find out that your only protection was to place the order at the set price and further, be willing to accept only a partial fill. Why? Because the stock pushed higher...end of story?
Millie-Second
is all it takes to rip you off! Believe it or not, there are computer programs that read trades, understand volume and execute a trade before your transaction, which pushes a stock price higher, thus making you pay more for your trade.
How? High Frequency Traders(HFT)have their servers in the exchanges and in coordination with Wall Street Banks are always first in line for any trade that HFT wish to make. People, these computer codes can decipher yours and every body's orders. They know your position. How strong or how much you plan to buy. It is like this: the horse race is over! The winning horse is getting its roses in the winners circle and now, your bet is placed. You are being skimmed, cheated, ripped-off everyday.
We can thank Brad Katsuyama. He led the trading floor for the Royal Bank of Canada when he felt something was wrong because this happened to almost all his trades. He found out how HFTs use fiber optic cables within the exchange that only need one-thousand of a second to know your order and decide if it wants to beat you to the price, forcing you to pay a higher price. Do this everyday, and you will make a lot of money off of any trader, especially those who purchase large transactions. Even the wealthy are being taken.
Cannibalization of paper money!
There is going to be news every week in the near term concerning HFT. The Attorney-General of New York is after these people, saying that basically, they are trading on inside information. Whose? Yours! In the cavalry charge is the FBI, DOJ and the CFC. Charles Schwab said,"this is a cancer that needs to be eradicated, HFTs are gaming the system."
Anyway, Brad Katsuyama left RBC to form his own fair trading exchange called the I.E.X. They do not allow HFTs, however as Joesph Schumpeter stated, " capitalism is a creative destruction," meaning something new will be developed. In trading the new approach is using micro-tech wave towers which are even faster than fiber optics.
Bottom line: we all have a new middle-man to pay before our trade is complete. We got commissions, taxes and now, HFTs to pay with the hope that whatever we buy or sell is going the way we thought. Another nail in the coffin of free enterprise. Maybe Nine Inch Nails will sing a song about it?
O-J-T: you don't hear of on-the-job-training anymore. Why train workers to improve your product when you outsourced your whole company. In a turn for the better, some companies are going back to the basics. It is in that light that I want to give a "Shout-Out" to National Oil Well, Varco(NOV). They are training workers for high paying jobs and even got the local community colleges into the act. Finally, an appreciation for the laborer and a wage that makes you smile to go to work. Congrats to NOV!
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