Markets are being rigged

A New Commentary Each Wednesday April 16, 2014

MARKETS ARE BEING RIGGED

After I saw an episode on the CBS News Magazine "60 Minutes," featuring an interview with author Michael Lewis, where he describes how computer programmers devised a way to legally rig market exchanges, I did some research.

To begin with, using insider information to "run ahead' to buy and selling trading instruments such as stock, is patently illegal. Ask Martha Stewart.

Others in the past have made money in the markets by lying, cheating and stealing...and by being willing to risk going to jail for doing so. However, so far, the method now loosely termed legalized front running is not contrary to any present law. The operative word is "legalized."

I've no idea what it would cost to build and maintain an air-conditioned warehouse full of supercomputers, but that's what you'll need first in order to get started on becoming filthy rich overnight with this scheme. Just make sure that your computers are connected to those belonging to a major market exchange by fiber optic cables.

In fact, if I were going to do this, I would attempt to locate my warehouse full of computers as close as possible to a major exchange.

I will not attempt to explain why this sort of "broadband" system is faster than any other. Remember when you had a telephone line connection to the Internet? There was a time when my coffee maker was faster than my connection via the telephone lines to the World Wide Web. In this new scheme, broadband speed is not anything, it is everything and fiber optic cables are the speediest.

Here's also what you need to know: Some supergeek programmers have designed software with algorithms able to take advantage of this high speed platform by detecting a buy order signal while it's on its way to acceptance already sent to a major exchange, but not yet confirmed - and automatically place a buy order in front of it. We're talking milliseconds here - each a thousandth of a second. The idea is to sell you and all other buyers who follow you the shares you wish to buy at a higher price.

In case you've forgotten a market axiom, buying makes prices increase. The method I'm trying to describe is better than weaving straw into gold. It may only be pennies per transaction, but a few thousand of those a second adds up to billions of dollars of profit. Absolutely guaranteed!

You may have a great broker. Chances are the firm has high speed connections - but perhaps not high enough to beat this latest platform designed for use by high-frequency, high volume traders - hedge fund managers, for example.

If you follow the practice espoused by Warren Buffet who believes that his favorite time span for holding an investment is forever, you're probably okay, that is, if you hope to live forever.

You say that what I've attempted to describe is just good old American ingenuity and someone has finally made something that works every time. What's the harm in that?

Since 1934, the Securities and Exchange Commission and other bodies have attempted to establish equitable principles of trade. These must provide a balanced marketplace; a level playing field for all. Otherwise, loss of trust in the markets will result in economic chaos. It's long past time for the SEC to investigate and proceed against this new way to rig the markets. It is not fair and should be made illegal.

Phil Richardson, Observer and Storyteller.

If you wish to comment, my email address is k7os@comcast.com or, you can go back to the email with a link to this page and click "Reply."

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