Market Report and High Frequency Trading

Last week, March 31-April 4, all three of the major indexes fell; NASDAQ -2.6%, DOW -1%, S&P 500 -1%. Much of the decline took place the afternoon of April 4, when investors rushed for the exits. Stocks such as Facebook(-4.6%), Priceline(-4.79%), Amazon(-3.18%), LinkedIn(-6.29%), and Tesla(-5.84%) all fell dramatically as questions about future prospects arose. In addition Bio-tech and Healthcare stocks all fell and the technology sector fell -0.5% with Microsoft, IBM, and Oracle all experiencing losses of some degree.

The much anticipated job report was also released last week, revealing that for the month of March 192,000 jobs were created, which was less than expected. However this is unlikely to influence the Federal Reserve to adjust its policy of slowly drawing down the economic stimulants. It was also revealed that the unemployment rate has held steady at 6.7%.

This week in the market has been very significant as the Federal Open Market Committee’s minutes from their March meeting were released, revealing a more dovish stance that expected. In response U.S. Stocks rebound from the past week with all three major indexes reaching session highs; NASDAQ +1.72%, DOW +1.11%, S&P 500 +1.09%. The Chief Investment Strategist at ING U.S. Investment Managements, had two major takeaways; 1. Rates will stay low and 2. When they do rise, it will be a slow process. Other notable takeaways from the minutes are that Real GDP has been lower than previously projected, partly due to the unusually harsh winter and downward surprises in the unemployment rate.

The NASDAQ bio-tech index (+3.6%) and the Global X social media index (+2.9%) were most responsive to the release of the minutes. Especially Facebook, which shot up +7.3% yesterday. Facebook was aided not only by the minutes but a JP Morgan Analyst who pointed out that the social media giant was still very early on in the monetization of its huge 1.2 billion person user base.

Now that we’ve summed up the recent news in the market we can begin addressing a major issue that has been coming up recently.

High Frequency Trading (HFT) is a type of algorithmic trading that uses highly sophisticated technology and advanced algorithms to trade large quantities of securities in a fraction of a second. Recently both the FBI and the SEC have opened up investigations into this trading technique which controls more than half of the $23 trillion dollar U.S. Market. In response to this HFT leaders have made connections with lobbyists in Washington D.C. in order to protect their interests. Lobbyist have managed to convince the investigative bodies to take a wait-and-see approach to the investigation, giving HFT leaders a chance to prove their worth. The debate on the legality of HFT was spurred by the recently released book “Flash Boys” by financial journalist Michael Lewis, in which he accused the stock market of being rigged by stock exchanges, banks, and HFTs.

The big issue with HFT is the idea of front-running. Front-running is when a stockbroker executes and order on a security of their own account before processing pending large orders from their customers. In doing this, the broker gets in at a low price, and upon executing a large trade the price of the stock shoots up and they are able to get out making a quick easy profit while the average investor ends up paying more or getting crowded out.

Charles Schwab has described this form of front-running as a “cancer undermining confidence in the free enterprise system.” In addition Bloomberg Businessweek stated pointed out that while high frequency trading has little effect on “mom and pop investors” it has a huge effect on individuals who have invested in large pension funds and retirement funds. That is, you average person’s investments in their futures is being diminished because HFT are driving the prices up.

Front-running by individual brokers and asset managers is illegal, but not all types of front running is. The most common example of front running is when a traders buys shares of stocks just before large orders are processed driving the price up. This information can be obtained legally by monitoring bids and asks on the market and the investing transactions of institutional investors like hedge funds. This is something that anyone can do if they so choose.

High Frequency Trading has its positives in that it keeps volume up and can help drive the price to its equilibrium but is it really worth it when the majority of the population is getting crowded out of the opportunity to make big gains?

Below Is a Link to the 60 Minutes video on Front-Running and High Frequency Trading.

https://www.youtube.com/watch?v=BweADB78tBY