This is the clearest explanation of HFT I’ve come across.
As far as Mark to Model accounting rules are concerned, we have already established that it is fraud; legal and government sanctioned but fraud nonetheless.
Some of you are asking how either practice is fraud and, more importantly why.
HFT is fraud in the same way a company buying its own common stock in the open market by taking advantage of low interest rates is fraud. That is, it gives investors the appearance of liquidity thus interest in a stock. Interest in a stock and liquidity are two fundamental signals used by investors to make investment decisions. When Goldman Sachs engages in HFT in a particular stock and/or the CEO of a company takes a loan in the company name and buys his company’s own stock, the collusion of just two actors and a computer program creates the impression that entire swathes of investors are interested in a particular stock. This induces other investors to take positions on false premises. As investors buy the stock, the perpetrators of HFT earn money on the spread whilst the CEO earns money on stock options.
So, how does that affect little old you? Let me assure you this is not a victimless crime.
You don’t have to be an investor to get screwed. If you are a tax paying citizen; if you live in a house or an apartment; you are getting screwed regardless of whether you invest in the stock market or not.
You see, like most people, you probably pay taxes that you hope will be invested in public services like road networks, refuse collection and disposal, firefighting or bridge building. Probably you also pay some type of insurance and contribute to some type of pension fund. The money you pay goes into funds that are managed by fund managers. However, fund managers do not get paid a salary if they do not deploy these sums.
And here is the kicker – if a government decrees that a company is allowed to disregard accounting rules pertaining to their true financial position, this company can maintain an investment grade rating by Fitch, Moody’s or Standard and Poors for example. If also the same government allows Goldman Sachs to make use of their proprietary computer program to artificially inflate trading volume in the stock then the illusion is complete.
A highly liquid investment grade company is all fund managers needs to know to invest the cash they receive from you and me. This is because if the investment subsequently goes up in smoke the investment manager’s ass is covered both by the investment grade rating of the company and by the trading volume of the company stock that indicated that large pools of investors had an interest in this particular company.
Let’s take a look at what is happening today.
In the fall of 2008 we had a number of the largest financial institutions in the world go to the brink of bankruptcy. As some of them fell over, governments stepped in and arbitrarily handed over public funds to “stabilize” these banks because, ostensibly, they were critical to propping up the world’s financial system. However, other than an almost total lack of transparency on how these emergency funds were distributed and to which companies, some observers postulated that the funds appropriated were not nearly enough to clean up the problems. Indeed, in the USA with two successive administrations, funds of 1.4Trillion were appropriated and guarantees for several more Trillions were made amounting to something in the range of 12 to 14 Trillion Dollars of cash and guarantees. Not bad.
However, considering the Bank of International Settlements assessment of outstanding derivatives, 14Trillion is a drop in the ocean. Heck! 50Trillion wouldn’t even begin to measure up.
So what, you may ask, was the solution?
The “solution” is nothing of the sort. What our governments are doing is tapping you twice and telling you that you’ve only been tapped once. Our governments’ aim is to buy time.
In the first round governments gave public funds to banks – sometimes repeatedly (i.e. AIG). This is the round government tells you that you are being tapped.
In the second round, governments collude to make the banks appear solvent so that fund managers could safely hand over your insurance and pension funds. This is the round government is not telling you that you are being tapped.
What might be incredible in this whole boondoggle? The sheer sums we are talking about? Is it the notion that governments will not act against the interest of the people? Is it the notion that banks cannot go bankrupt because they are banks?
What is so incredible about what is clearly and blatantly happening and that is obviously and unmistakably against the interest of the people?
Please tell me what you find incredible in this whole thing and when you do, please explain how you can reconcile the numbers in a manner that is not leading us into a world war.