High Frequency Trading: The Problem Of The Two Edge Sword

 

Suddenly it seems the State and so called law enforcement authorities have become “very concerned” about high frequency trading (HFT).   The tip off for me on this new narrative was coverage by 60 Minutes of the negative impacts of HFT and of Michael Lewis’ new book, Flash Boys on the topic.  60 Minutes is defacto State Media and does not report in a vacuum.  Lewis is a great financial author and has written other excellent books, but these have not received this kind of attention.  In addition the FBI is calling for HFT whistle blowers and has provided a phone number for that purpose. That would be 212-384-1000, yes that’s 212-384-1000 for the FBI. This is quite the departure as the Obama administration has shown nothing but contempt and abuse for whistle-blowers.

The news that HFT is abused is not new, so why the move now? The reason is that HFT is an instrument or causa remota in amplifying the Great Stock Market Pump of the last several years.  HFT combined with extreme doses of causa proxima Quantitative Easing is like that last shot of Tequila you shouldn’t have had before you wake up and find your face laying on the table in a pool of your own drool.

Without a doubt these operators front run the massive leveraged corporate stock buyback programs that has been a key component of inflating the stock market. I have little doubt that key HFT operatives are given advance notice when a slug of corporate stock is about to be bought back at the trading desks.  But I some how doubt that this aspect will be revealed in the FBI investigations.

This pursuit of HFT operators signals that the end of the Great Pump is at hand.  I sense this will be a sell in May and go away proposition most likely after insiders dump all they can muster. The problem HFT presents is that it is a two edged sword, and can also be utilized to amplify a Dump as well as the Pump. It could also be an influence in triggering a crash event.  As the air gets let out of the financial bubbles the last thing the System needs is a monster pile on HFT flash crash. Therefore with the usefulness of HFT used up for the Pump,  it becomes imperative to head off at the pass the amplified effect HFT will have on the Dump.