After watching “60 Minutes” Sunday night and reading Tim Worstall’s story in Forbes, “Michael Lewis Is Entirely Wrong About High Frequency Trading Hitting The Little Guy,” I am 100% sure that there is more denial than facts coming out of the Forbes story. Let’s face it, algorithmic trading is not good for the smaller traders and anyone who says it is has no idea what they are talking about.
Below are a few quotes from “60 Minutes,” along with our comments. I don’t know if Tim Worstall has ever traded a futures contract, but I’ll put my 37 years on the floor and creating one of the world’s largest S&P 500 index operations against his opinions.
60 Minutes:
“Robots aren’t just taking your jobs, they’re stealing your profits on stock trades, too.
MrTopStep.com: Yes, the robots are stealing our money and have been for years. That is nothing new, Tim.
The stock market has been rigged by a group of tech-savvy insiders who are using super-computers to game trades at the expense of normal investors, journalist Michael Lewis charges in his new book, “Flash Boys.”
MrTopStep.com: Tim, stocks were rigged first and after the algo boys overran the stock market they moved to the futures. The practice not only steals money but there is no doubt that the practice causes moves that would never occur otherwise.
I have been in the S&Ps since 1985 and did the UBS program trading business in the S&P 500. I have been part of every major stock market move since the ’87 crash and no one can tell me that the practice of algorithmic trading doesn’t disturb the overall price action of the markets. Nor can anyone tell me that algorithmic trading wasn’t the cause of the flash crash and thousands of other aberrations that help the retail trade lose and the machines make money.
The robots’ high-speed networks allow them to buy the stocks milliseconds in advance — enough time to push up the price for the investor that had made the original order.
MrTopStep.com: Yes.
“They’re able to identify your desire to, to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price,” Lewis said. “The speed advantage that the faster traders have is milliseconds … fractions of milliseconds.”
MrTopStep: Yes. We’ve seen it happen day after day. Tim, you go on to say, “And while I’ve not got the detailed numbers to prove it, I’d be willing to bet a very large sum indeed that” the net activity of HFT benefits small traders. Well, you haven’t got the numbers and you haven’t bet a large sum. So why didn’t you ask someone who has? I’d be happy to give you a list of names.
The villains are a “combination of these stock exchanges, the big Wall Street banks and high-frequency traders” who are bagging billions every year with the practice, Lewis said in an interview Sunday with “60 Minutes.”
The victims, Lewis adds, are “everybody who has an investment in the stock market.”
MrTopStep.com: Tim, no swipe at you, but after handling the S&P 500 futures business of some of the largest investment firms in the world and doing all the program trading I did years ago and watching the program trading volume make up over 70% of the daily volume, I place very little credence in your story. The next time Forbes wants to do a story on algorithmic trading but doesn’t have “numbers to prove it” or a solid connection to reality, have them email me: danny@mrtopstep.com.
Volume matters
Volume has always been a key element of trading, and that is why the algo traders have moved from stocks to futures where there is more robust buying and selling going on. It’s not that the algos don’t play stocks anymore; it’s just overloaded. Where the algo used to try and make a penny or a half penny it’s now down to trying to make one-tenth of a penny.
As more programs flooded the stock markets the “vig” disappeared. In order to stay in the game, algorithmic trading moved to the futures market and now it’s moving to the options markets.
Volume matters in this case, but not to the retail investor who constantly gets knocked out of a position by an algorithmic program that chases buy and sell stops. This volume could be taken away but the exchanges have forgotten about who the real customers have been. The real customers are those seeking to accurately value companies and commodities, not just wring billions of tenths of pennies out of meaningless volatility.