One of the biggest market newsmakers recently has been Goldman Sach's high frequency trading program. The automated system is incredibly complex, using data obtained from the NASDAQ and NYSE markets to front run virtually every trade that happens on the exchange.
Front Running the Markets
Front running is comparable to a pump and dump scheme, the benefit, however, is that you don't have to pump, you only have to dump. What Goldman Sach's trading program would do is examine every trade going through the stock exchanges and then, in a matter of miliseconds, buy or sell before the first position hit the market. Ultimately, the automated platform would skim millions, if not billions, from the market each day, without adding anything worthwhile to the market as it is.
Exchanges Selling Out
Three firms, which encompass 66% of all stock volume in the United States have essentially sold out to their biggest clients by offering priceless data at an extreme price. In exchange for a few million dollars, you too can see which orders are soon to be processed, allowing you the opportunity to buy before the rush and sell right into it. The system is naturally fraudulent, granting access to very valuable data for a quick payout to the exchange.
No Small Problem
The NYSE Euronext suggests that as much as 42% of all daily volume on the exchange exists because of flash orders, those that are front running. The data is interesting to say the least as virtually every trade on the exchange is met with equal volume from someone, in effect, ripping them off. By driving such huge volumes, flash trading allows market markers, such as Goldman Sachs, to take shave pennies in each transaction, creating huge million-dollar profits each and every day, without risk.
What Happens Next
There have been plenty of requests by the SEC to regulate the new flash trading industry and a small investigating is currently underway. For the sake of investors, both large and small, I hope that flash trading is outlawed, and the firms that have used it are not fined, but instead taken to court, where they can be sued for unbelievable amounts of money. The fact is, if you have placed a trade in the past year, chances are you were front-ran. If you sent in an order and the price slipped, rising a few pennies before you ordered, you can thank Goldman for stealing those pennies. The process is pure criminal, and I can only hope that those that have used the system will be adequately put in their place.