Saturday, July 11, 2009

Worries about proprietary trading

My earlier post was Closed Room and a Chart.

The Americans are still the best defenders of people's rights. For investors and traders, this means, sooner or later the American public rises against abuses of the financial system. One such case is coming over proprietary trading.
Background: Goldman Sachs (GS), the largest US Banker/Broker files a complaint against a software developer who worked for them. GS says that the developer stole some computer code relating to "high frequency trading". The police took immediate action. Fair enough!

But media as well as bloggers started asking: what exactly was 'high frequency trading'? The answers were surprising. The Big Picture says that large institutions maybe taking advantage of order flow information and front running the retail traders. ".... recent revelations are forcing the Street to consider the possibility of automated front-running on an unfathomable scale."

My Notes: I am not surprised. In this blog, I have warned many times about proprietary trading by brokers. Why should brokers trade derivatives on their own account?

Bloomberg has a hard htting report which says the prosecutor (on behalf of GS) told a court that " The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”

"Meantime, it would be nice to see someone at Goldman go on the record to explain what’s stopping the world’s most powerful investment bank from using its trading program in unfair ways, too"

My Notes: I think, programs are now available in India which plug into the NSE and automatically trade for proprietory trading brokers. What information do these programs read? Trading is a zero sum game. This means the money that the brokers make with high technology software is coming from the pockets of retail traders who cannot have access to what the brokers have. This becomes an unfair match! SEBI may like to consider restrictions on proprietory trading by brokers when the world over this practice is being banned.

Update on 12/7 at 2050 hours.
“High-frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don’t even know it.” (Themis Trading)
The link to the white paper is http://www.themistrading.com/article_files/0000/0348/Toxic_Equity_Trading_on_Wall_Street_12-17-08.pdf. Themis Trading is at http://www.themistrading.com/.

2 comments:

MONEYVISTAS said...

Good piece of informaiton you shared with us.Thanks for sharing with us.

Best regards

http://moneyvistas.blogspot.com/

sumit said...

IT IS MY FIRST COMMENT SIR & I M A GREAT FAN OF YOURS
I AGREE IT MAKES THE RETAIL INVESTOR GET TRAPPED IN SUCH SITUATIONS FROM WHERE HE GETS TRAPPED OVER AND OVER , SUFFERING HUGE LOSSES.