LOL! The Market Is Rigged (HFT)
I spat my coffee this morning....
Eric over at Nanex has been on this for a number of years. I've been on it too. And now there's a new book and suddenly CNBC is talking about it to all three of their actual viewers.
At the end of the day the problem is that providing someone a way to cut in line is against the law.
But that doesn't bother the so-called "regulators" just like nothing else does, provided you make them enough money for them to look the other way. The price of that willful blindness can be shockingly cheap; in general the revolving door between Wall Street and Washington DC turns both fast and profitably for both cities.
Everyone wants to wring their hands on this but the simple fact of the matter is that the exchanges, which are regulated entities, actually pay for so-called "quote traffic" under certain circumstances and they have set up structures that encourage this sort of behavior.
The defenders of this behavior claim they're providing a "benefit" to investors usually related to alleged "liquidity." But as I pointed out years ago if you and I trade 100 shares of a stock back and forth 1,000 times there is the appearance of 100,000 shares of liquidity in that name but in fact there is only 100 shares of liquidity present. If some third party comes in and tries to buy or sell more than 100 shares this will become immediately apparent, because neither of us is willing to transact in more than that number at any given point in time!
I said this back in 2010, nearly four years ago:
Force all orders to be valid for one second. That is, once you place an order, you cannot cancel or modify it for one second. It must remain "exposed" for at least that period of time, during which it may be executed against. This makes placing tens or hundreds of orders in the book beyond what you truly wish to transact extremely dangerous, in that a sudden price move can leave you owning (or short) all of those shares you represented as "available" to buy or sell.
Impose a exponentially-increasing cancellation fee as the number of cancels rises against the number of executions for a given market participant in a reasonably short period of time (e.g. 10 minutes.) Permit one or two cancels per filled order for a given number of shares in an issue over a reasonably-short period of time without penalty. From that point forward impose a fee that begins at 1/100th of value of the order and doubles for each successive cancel without an execution, up to the entire value of the order. This makes the tactic of placing 10, 20 or 30 orders for each one you intend to execute extraordinarily unprofitable and stops that practice immediately.
I have since changed my mind slightly -- the first bullet's interval should be two seconds instead of one, and I've added a third point. Why? Because any order you place into the market should be able to be executed against by any human making a manual decision, which means that the quote should have to be valid until either it executes or all humans can physically see it with their eyes, react to it, and get a message back to the exchange with instructions for execution. Human reaction time is about 1/2 second and since people do trade from anywhere on the planet you must have two round-trip message times around the planet accounted for (once to see the quote, once to react to it and receive confirmation that your order was accepted.) Two seconds accounts for all of this; one might not.
Second, all orders you have out must be able to be executed. This means you must have the margin capacity to clear every quote you have open. If I wish to have open 10,000 shares worth of a $10 stock I must have $100,000 worth of buying power in confirmed and available margin capacity and during the time those orders are pending. If this is not in cash then I am functionally borrowing the funds during that time (and that is never free.)
More than eight out of ten "trades" currently executed are nothing more than gaming the system. There's no social benefit to this, and the idea that there is no "harm" to others that comes from it is fanciful. Nothing ever benefits someone without there being a concurrent cost somewhere. That the cost is diffuse and a tiny fraction of a cent per person who actually trades whether it's you in your 401k or some Wall Street bank is immaterial to the fact that someone's paying for these distortions.
Finally, there is simply the law to consider. The Securities and Exchange Act makes unlawful "market manipulation" and Reg-NMS mandates that the consolidated quote be the actual best and time-sync'd feed of quotations. Selling a higher-speed feed is arguably a direct violation of the law.
None of this is difficult to figure out, but in a world where legislators pass laws that legalize bribery in various forms by calling it "campaign contributions" and people walk between writing laws and allegedly living under them via the revolving door between Wall Street and Washington should we really be surprised that chief among these people's goals and accomplishments are ways to exempt themselves from behavior that would, for anyone else, land them in the slammer?