In our last piece, we talked about the recent development in stock and equity markets known as high-frequency trading (HFT). This term is used to describe the process by which computer algorithms process orders and trades much faster than any human being is capable of matching. We also mentioned the flash crash of 2010 and how it shook investor trust in U.S. markets.
Today, we'll look at several revelations that have come to light recently about HFT, including one from a former Wall Street trader.
In late September, Haim Bodek, who according to news source CNBC once worked for the likes of global banks UBS and Goldman Sachs, spoke with the network about his experiences in the stock market. What he had to say about HFT was, simply put, damning.
"I felt, I'm playing poker with a bunch of guys, and six months after I'm losing over and over and over, they say, we're cheating. Didn't you know? Everyone knew," Bodek told the source. "And I came to the conclusion that it is actually an unbeatable system right now."
Bodek went on to say that HFT, by his estimate, accounts for between 50 and 70 percent of current market activity. One particular trick he mentioned was "queue-jumping," which involved algorithms front-running larger institutions as they tried to put a floor on price developments. Because of the "churn" created by the HFT activities, prices changes occur too quickly for most investors and traders to react.
According to an article published by finance industry source UBM TechWeb, the Chicago branch of the Federal Reserve had been voicing concern about HFT since 2008. The central bank feared that such activities would expose vulnerabilities in the system. This terror was realized in early August when equity firm Knight Capital suffered a $400 million loss after HFT algorithms went berserk due to a simple computer glitch.
It's a bad sign if even those who may benefit directly from HFT activities are saying the system is rigged. Therefore, it's a great idea for investors to consider other methods of asset protection. One way to store your money safely is by investing in cash flow real estate. By purchasing quality rental properties, you'll see returns that aren't subject to the lopsided rules of the stock market.