Laws and ethics beat investors

​Exchange honor and integrity sold

That HFT used laws and ethics to beat investors seems bazaar! But it happened, it was a shameless selling of honor and integrity! That happened when exchange managements sold out to HFT. 

When exchanges changed markets to sell out investors for HFT dollars, markets and investing changed. Because of that, exchanges began picking up HFT fees, in exchange, their honor and integrity had been sold and paid for. In a high speed flash, fair markets and honest trading faded into history.

Fair markets need mutual, complementary and reciprocal exchanges. To be that, exchanges must have integrity. Having integrity means one level playing field, free of misrepresentation. That can't happen with changes made and built into markets to favor HFT

But is can be fixed. After all, the fix is to renew the honor by returning to market integrity and fair dealing. When that happens a renewed environment could deal with and misrepresentation or tilted playing fields.

Deeper looks reveal insider advantages

HFT play with insider advantages bought by getting markets changed. Business environment and culture actively contributed to the success of HFT. The exchange breakthrough was triggered in response to the financial crisis with the legal code help of the HFT wizards. As well, the trading time standard contributes to the HFT success. When the media exposed HFT as noted in Lesson 5, alerted investors began asking questions. In time more became aware HFT was an investing issue.

Once the veils obscuring HFT secrets were lifted, investor eyes got the first looks at the inside fix. That showed HFT was more than another trading system. More than that, changes made to exchange operations and favorable access to location and data made HFT inside partners. Favorable inside deals with exchanges built in advantages favoring HFT over investors. At the same time and throughout the process, business culture, rules and law supported HFT. Clearly, laws and ethics beat investors while favoring HFT.

High frequency trading favors include:

Exchanges had three major aspects that developed into inside advantages working in favor of HFT. They are: 

​​1. Legal and regulatory structure supports HFT

​2. Business contacts and contracts favor HFT

3. Market structure fixes or changes favor HFT

High frequency trading alters markets

HFT developed from computerized algorithmic trading. In the beginning they were just another automated trading system. But that quickly changed. That change happened when exchanges permitted HFT inside access and data feeds. That sealed the fate of investors.

Law, deals and structural changes all support HFT. Choices, actions and events supporting HFT changed stock exchange business models. With those changes, HFT became far more important to exchanges than investors. Once HFT was sealed into the heart of stock markets. HFT growth exploded.

That growth was a continuation of business culture, rules and law supporting HFT. Market predators won, both investors and listed companies lost. As a result, volume and profit by any means won favor over truth and transparency. In addition, more than just doing business, changes and choices tilted markets against investors and listed companies.

Profit - the biggest business value

Profit occupies the core of capitalistic business culture. Also in the core of public capitalism, stock markets hold a key inside position. Most important, capitalism funds, accessed through markets, build production, trade and industry. All driven by the private pursuit of profit.

Capitalism has a great record of success

Capitalism has a far greater record of raising more humans from poverty to prosperity than any other system in the history of the world. It is the most successful economic system ever developed. In fact, capitalism continues the process of lifting more humans from poverty. That happens while it produces wealth for more people than any other system has.

Business culture carries influence

Culture, a people's way of doing things, forms part of any organization. Every business has group values, goals, obligations and expectations. That also applies in the stock exchange business. Like any other, to grow and prosper the business of a stock exchange must make money. Those that do not, flounder or fade into economic backwaters.

People accept the need for a business to make money. Most people also expect business to​ do more than make money. That includes expectations that the business plays a possutuve role in the community. That is a mutual plus side or greater social role. That role to be more, a plus or broader role, means the business be an active contributor to the community.

That includes playing part in a broader economic, social and community life. Owners, managers, employees and communities all expect to influence a business in their community. They have expectations of the choices that business leaders make. But not all agree, or accept, that burden. Some organizations deny any duty beyond making money.

Such firms have owners, managers and attract employees focused only on pursuing profit. They rationalize that little or nothing more matters. Such firms tend to attract money focused workers. Many financial service firms have such attitudes, values and cultures. Such firms, focuse on little beyond money making. A few marketers of public relation spinners are hired to oversee their minimal social efforts to spin their image.

In very competitive specialty trading and investing firms little but profit production matters. These are the extremes of business culture, rules and law supporting HFT. Such firms can seem like gangs united by "greed is good" values. Unfortunately, HFT firms often fit that narrow mold.

Greed for profit justified laws and ethics to beat investors

Ranking profit as the prime or only value twists thinking and behavior. Such greed has consequences beyond a single job or firm. Those can be examples of greed that twists conduct and ethics. Those twits lead to misuse, bias and justification of profit by any means. In short order, that can overwhelm any need to be fair or do what is right.

When crisis confronts the pursuit of profit by any means, great distortions happen. In a crisis, bent business values make bad choices and produce poor social outcomes. That happened in 2008 when the financial crisis confronted stock exchanges and HFT.

Legal and regulated markets rigged

An important influence of the business environment is the law. The law also plays a leading role in understanding HFT and stock market rigging. We now take a quick look at the law. We can learn how HFT remains legal while having the effect of rigging stock markets. The law is not concerned that investors feel ripped off.

Advanced developed countries follow the rule of law standard. In general that standard presumes anything goes unless a specific law says you, I or anyone can not. You, I or anyone can do anything, except what is not permitted by law. That applies in advanced countries, is such nations the law applies equally to everybody including governments.

We don't need to get into an equality debate over this. In theory and in law all are equal. We all know that at times some seem to be more equal than others. So far, no person or society has come up with a better way.

Business culture, rules and law supporting HFT does push some buttons. Still most of those that make laws express no concerns. The law, not common sense, ethics, morality or fairness matters. Do be mindful these few words and simple explanations grant no law degree! These simple general statements give a very thin overview to explain the rule of law.

The law, permission and limits

When dealing with any law there are many nuances and endless questions possible. That keeps courts and many high priced smart lawyers busy. In general, laws set limits. In most cases, those limits are what you can not do. To clarify, the law does not grant permission. So in the case of HFT, laws and ethics get used to beat investors while supporting market tilting changes.

Permissions or what you may do gets granted under regulations. Those regulations get created by a specific laws created for the purpose of creating the regulations. So, in complex matters, new law gets made to creates a regulatory system. Examples of that include licensing truck drivers, pilots or selling securities or providing healthcare.

Convention or business culture, rules and law supporting HFT includes other practices. Common practice of organizations and across industries builds a body of norms. Often such common practice are not law or even written. In that case, such norms permit behaviors unknown to outsiders.

For example, lawyers often excuse legal behavior as acceptable. But, legal behavior can be unethical or morally objectionable. Still, the population may expect more, But most often, such issues produce no change and pass into memory. Most often, we get over it and carry on.

Laws pass or change on known issues

Lawmakers must be aware of an issue before passing a law or regulation. Without their attention, our cause or complaint finds deaf ears. And consider, small voices seldom matter when creating or changing law. For that to change, lawmakers must believe there is an important issue before they consider, create or change law. Because of that, the law is forever behind real life and events.

Security law creates rules. That is an example of regulations created to manage a complex matter. With passage of the law, regulations get created. Those regulators apply rules to all securities and security transactions, in that jurisdiction. Because of that, regulations oversee stock markets, investing, and associated financial services. At the time I write this, few securities regulators or lawmakers see the need for law to control or regulate, HFT. As a result, regulators responsible for the admistration of securities law, see no law that gives them authority to stop, bar or control HFT.

Bright minds and driven people

Clever people created and turned HFT loose on the investing scene. They are part of the mix of business culture, rules and law supporting HFT. They structure and use HFT to follow existing law. Although many regulators announced investigations into HFT, so far, nothing has happened. Don't hold your breath expecting that to change!

Think about the array of bright minds developing and supporting HFT. Fine legal minds, market and technical wizards get help from more bright minds. That list includes quantum physicists, climate scientists, theoretical mathematicians and AI scientists. Both alone and together all push the limits of HFT.

Most important, backing comes for these efforts comes from very deep pockets. And the owners of those pockets know how to lobby. All line up in favor of HFT. Don't expect significant changes to unfold soon. Rather learn how to deal with this 21 century fact of stock market and investing life.

Various politicians have spoken of or proposed regulating or taxing HFT. Some jurisdictions have but not most. Change is always possible. Just don’t hold your breath. It takes considerable time for anything to happen or change in security regulation.

Mixing greed, crisis and law to rig a market

Mixing cultures of greed, crisis opportunity and dated regulations set up market rigging. If ever there was a perfect storm HFT found one! As we covered in earlier lessons, technology is central to HFT. HFT wizards use the latest and greatest technology to make profit producing machines.

Supporters of HFT maintain that anything not specified as illegal is legal and good. That reduces right and wrong to the simple narrow scope of what is legal.

That considers any but explicit illegal action as right and acceptable. That rude crude and offensive thinking permeates HFT culture. It goes beyond ignoring any moral, ethical or social obligation, it denies them.

For a better society let's hope such nonsense good only for an amoral society gets contained. Of this I am sure. Securities lawyers will not be the ones to lead the way on this.

3 Monster sized high frequency trading holes

When it comes to business culture, laws and ethics beat investors and support HFT. Investor protection falls short. HFT clashes with public values even when it may be legal. We are talking legal holes here. Critics scream but huge legal holes let HFT speed away unscathed and not break any laws. As we know, under the rule of law, all but the forbidden can happen. That sets a low bar and easy dodge for business culture. Any rules and law supporting HFT makes it legal because it is not illegal. At least three huge legal holes frustrate critics:

        1. No clients here, only investor predators

Brokers and financial service firms have obligations to clients. HFT firms have no clients. They trade for themselves. HFT can not front run or cheat clients they do not have. That leaves them free of any obligations to clients as they stock and prey on investor orders.

        2. Public information pocket picking

Everyday, brokers and financial service firms get private client trading intentions. Regulations prevent them from using that information against their clients. That all seems as it should be.

But, HFT uses public, not private or confidential information to trade against anyone. That includes their clients!

Here is how that dodge works. An investor order becomes public information once posted in a public market. That is the key legal step. At that point the information is public. HFT then uses that public information and their immense electronic speed advantage. With no further effort the technology races ahead to place orders in front of investors. Including trading against their own firm's client orders.

        3. Time to run circles around investors

SEC time standard of 1 second became the world norm in a world of connected markets when HFT began. As discussed in Lesson 7, millisecond trading ran well ahead of an outdated SEC time standard. They have now set a new standard of 50 milliseconds.

That earlier standard accepted anything happening within a second, happened at once. One second allowed the impossible of masses of transactions to happen at the same time. Bizarre but permitted. Slow regulatory response to that issue helped HFT become well entrenched.

SEC time allows picking inventor pockets

HFT became well established when they had a leisurely second to get in front of investors. That established their market pow er and prowess. On the other hand, for humans, one second is quick. In the same time, computers can execute countless trades. No contest should that be a race. Wait a minute! With HFT it is a race and we lose every time!

That is all part of the business culture where laws and ethics beat investors and support HFT. Even the SEC updating the time standard to a 50 millisecond window does not level the market tilt. The blazing speed of HFT still puts any investor far behind in racing for any trade. Opening any window of time for trading gives machines a huge edge over humans. In any speed game humans lose every time against machines.

Time for alternative ideas to emerge

If one second or 50 milliseconds is too long, what should the time be? There are alternative ideas to the business culture, rules and law supporting HFT. One alternative suggestion suggested matching orders for trade at set intervals. Another approach is the IEX speed bump. That technology story gets detailed coverage in lesson11.

Combining technology, regulations and clever lawyering, works well for HFT wizards. Their great speed advantage still outruns us if not actually front running. They still get there first and pick up serious profits doing so. That is hair splitting pointed out by the claim they flash trade, not front-run! Hair splitting amuses lawyers but still picks our pickets. That provides little comfort when our lunch is getting munched!

Legal does not mean right, fair, moral, ethical or beneficial for society or markets. For any change, that must become a regulatory and a political question. Exploring those topics runs well beyond our need to develop an understanding of HFT.

Here our lesson focuses on understanding how laws and ethics beat investors. But most important, we must understand how to deal with HFT.

To be clear and fair, this is not a blanket condemnation of HFT. Informed observers, reporters and analysts see computerized trading as useful. And as part of the market. Lesson 9 includes some useful, justifiable and legitimate HFT strategies. Those strategies do not prey on investor orders.

Criticisms and objections focus on predatory HFT strategies. Those strategies prey on investors and listed companies. Excellent lawyering by brilliant legal minds produces an incredible situation. HFT technology legally profits from actions illegal for humans! Bizarrely regulators legalize and insiders justify putting HFT robot technology before investing humans!

R.I.P. truth, transparency and fairness

Thinking everything that avoids being illegal is right and fair uses the law as a shield. That shield protects the raw pursuit of profit by any legal means. It keeps that pursuit free of any moral, ethical or social obligation.

Using business culture, rules and laws supporting HFT buries right and wrong in a huge hole! Rest in peace, truth, transparency and fair trading. Using technology, cagey strategies and the law, HFT legally reaps colossal profits. They avoid going near the slippery slope of right and wrong.

Reports of investigators into HFT carry little meaning. Investigations by the FBI, U.S. Securities and Exchange Commission, U.S. Justice Department and the Attorney General of New York State have come to nothing. It seems the watch dogs are a tame bunch seeing no issue here as nothing has happened for years. I expect more of the same.

Because laws and ethics beat investors in a business culture supporting HFT, protecting us and our portfolios is up to us. We have to know HFT and how to deal with it. We need to know how to manage the market risks of HFT. Later lessons in this course teaches you how to manage HFT risks.

No SEC registration required

The SEC remains blind and unable to examine any books or records of HFT as there is no registration requirement. Although HFT are significant factors in daily trading, the SEC remains in the shadows of not the dark about much concerning these funds. The same applies with the CFTC (Commodity Futures Trading Commission). It is simply simple-minded foolishness that regulators have no access to the records for any investigation.​