The notorious market-rigging ringleader, Goldman Sachs

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investorzzo's picture
investorzzo
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Joined: Nov 7 2008
Posts: 1182
The notorious market-rigging ringleader, Goldman Sachs

An integral component of computerized front running is a dubious practice called “flash trades.”  Flash orders are permitted by a regulatory loophole that allows exchanges to show orders to some traders ahead of others for a fee.  At one time, the NYSE allowed specialists to benefit from an advance look at incoming orders; but it has now replaced that practice with a “level playing field” policy that gives all investors equal access to all price quotes.  Some ATSs, however, which are hotly competing with the established exchanges for business, have adopted the use of flash trades to pull trading business away from the exchanges.  An incoming order is revealed (or flashed) to a trader for a fraction of a second before being sent to the national market system.  If the trader can match the best bid or offer in the system, he can then pick up that order before the rest of the market sees it.
 
The flash peek reveals the trade coming in but not the limit price – the maximum price at which the buyer or seller is willing to trade.  This is what the HFT program figures out, and it is what gives the high-frequency trader the same sort of inside information available to the traditional market maker: he now gets to peek at the other player’s cards.  That means high-frequency traders can do more than just skim hefty profits from other investors.  They can actually manipulate markets.
 
How this is done was explained by Karl Denninger in an insightful post on Seeking Alpha in July 2009:
“Let’s say that there is a buyer willing to buy 100,000 shares of BRCM with a limit price of $26.40. That is, the buyer will accept any price up to $26.40.  But the market at this particular moment in time is at $26.10, or thirty cents lower.
 
“So the computers, having detected via their ‘flash orders’ (which ought to be illegal) that there is a desire for Broadcom shares, start to issue tiny (typically 100 share lots) ‘immediate or cancel’ orders - IOCs - to sell at $26.20.  If that order is ‘eaten’ the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40.  When it tries $26.45 it gets no bite and the order is immediately canceled.
 
“Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become ‘more efficient.’
 
“Nonsense; there was no ‘real seller’ at any of these prices! This pattern of offering was intended to do one and only one thing -- manipulate the market by discovering what is supposed to be a hidden piece of information -- the other side’s limit price!

http://www.globalresearch.ca/index.php?context=va&aid=18809

land2341's picture
land2341
Status: Gold Member (Offline)
Joined: Aug 20 2009
Posts: 402
Re: The notorious market-rigging ringleader, Goldman Sachs

Another example of the technology getting ahead of the law.  Oh yeah that's right there are no laws because free markets regulate themselves.  

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: The notorious market-rigging ringleader, Goldman Sachs

Who actually believes that making gambles reduces risk? Gambles only "reduce" risk if you prove to be more clever then the next guy who likes to gamble (i.e. you'd have to "reduce" risk before the market thinks you are wise with your bets). With information inflation, even this won't be sufficient. From there it will be claimed to be left on "pure" chance, but a better word for all of this is fraud.

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