Is High Frequency Trading “Insider Trading?”

Looking through the secret profit center behind Wall Street is like looking at wonderland through the eyes of Alice . It’s an amazing picture few ever get to see and fewer will ever understand. There are mega bucks floating everywhere. That is except into the pockets of those of us on Main Street who could use a little green coloring.

These HFT’s have been around since the 1990’s, ever fine tuning their computer software, searching for deals where the investors have not yet realized a stock is about to rise or fall, or where an exchange hasn’t provided consumers notice of a recent stock trade.

While billions of dollars are churned in mega seconds sometimes a million dollars and more in a fraction of a millisecond and on only a fraction of a penny profit. The stock market has become a fools paradise, left to the big hedge funds and their inside investors.

How do they work?

One way these traders make money is by exploiting the fact that stock indexes sometimes don't immediately reflect falling or rising prices of their component stocks. If GM shares for example rise 5 percent but an index fund that includes it such as the SPDR S&P 500 lags by a fraction of second to adjust, these HFT computers pick up the lag and buy or sell the stock in fractions of a second reaping large profits. HFT computers will “automatically” buy shares of SPDR S&P 500 at the lower price and then sell them again when they are fully valued, in other words, when the information is released to the general public.

Is this really Insider Trading, we believe it is because the information has not yet been released to the public!

This reminds me of the old days and Ben Siegel, who charged fees from bookmakers for a wire service that transmitted horse racing results. Often allowing bookmakers to lay off bets from a direct source after the race had been concluded.

It appears to be time that the SEC took a real hard look at these high frequency traders to determine if in fact they are trading on information that has not yet been made public.

Since Goldman Sachs is a part of this trading mechanism we need to take a hard look at its legitimacy.