Stock market management burns investors with market tilting changes favoring high frequency traders (HFT). Included are structural changes made by exchange management that sealed investor fates. They did that by serving their orders to HFT. It became a tipping point came when the NYSE changed in response to the 2008 financial crisis. As a result, markets and investing changed. Once those changes favoring HFT happened on the NYSE, virtually all major markets did the same.
Question answered in this lesson:
Do stock markets support high frequency trading?
Managements of stock markets made changes feeding investor orders to HFT. Those changes were in the structure and operations of stock markets. So beginning with those management made structural changes as well as several lucrative fee attracting deals, changes were done that favored HFT. It was those changes that sealed the fate of investor orders by making them available for HFT to easily fed upon.
Those changes tilted markets against investors. And those market tilting changes transformed markets and investing. For further discussion and details continue with, Stock market management burns investors. It is lesson 7, of White Top Investor course 510, High Frequency Trading Explained. To learn more on related topics, click the links at the end of this lesson.
What you learn from this lesson:
Market management burns investors
This lesson discusses how decisions and actions of stock market managements put in place changes that transformed markets and investing. In fact by learning how HFT feeds on investor trades can help investors prepare to change and be able to defend their investments from these threats to wealth building. That can transform how you invest. This lesson gives you the background to understand how stock exchange managers changed markets to favor HFT.
NYSE has a leadership role among exchanges
Thinking about the leading role of New York in many fields brings to mind the classic sung by Frank Sinatra, New York New York, “...if you can make it here, you can make it anywhere...”! And because it is Frank Sinatra that came to my mind shows my age!
Frank Sinatra was a crooner of a past era that always did a great job on this classic song celebrating New York. Also a New York classic, The New York Stock Exchange (NYSE) leads world markets in value and volumes traded. As a result, it enjoys a leadership role that carries clout far beyond New York. And that can influence policy setting in stock exchanges and markets across North America and well beyond.
New exchange ownership changes everything
HFT was in markets and well into growth but changes at the NYSE brought the market infiltration to a whole new level. It was an ownership change and a world rocking event that opened the doors to HFT. But is was the new NYSE ownership laid out the red carpet and opened the doors wide! That new ownership era began in 2006 with a change in the NYSE ownership structure.
Like everything in capitalism, the decisions were ultimately all about money. Until 2006 NYSE structured itself as a traditional stock exchange. It happened when traders set up a common meeting place and times to trade. That structure was more like club members owning a common business place. Members, called seat holders, owned and together controlled exchange operations. They used the exchange to conduct their business which was raising and placing capital.
Making capitalism work for everyone
Like many stock exchanges, the structure began operations as mutual corporations, cooperatives or the equivalent. Those seat owning members had access to doing business there. And importantly, seat owning members sought fortune through their business operations to find and place capaital, not from driving the exchange operations to become a primary producer of great capital profits.
Until then, exchange management provided an efficient place for the business of members. In the past, the operating focus of exchange managers was to keep costs low and the market open to all. Keeping the playing field reasonably level was a given. Seat holders liked exchange management focused on efficient operations at low cost.
Seat owners used their privileged market access to collect lucrative service fees. Large fees for raising and placing capital made them money and low costs kept them satisfied. Those fees went to each seat holder business, not to or through the exchange. It was a very exclusive insiders club but that arrangement worked reasonably well for everyone.
Exchanges served the need for finding and placing capital
Companies needing capital had a place to access it and investors seeking opportunities enjoyed many choices. Fortunes and opportunities were continually available. Over four centuries of stock market history, enterprises, societies, millions of people and nations all grew in prosperity with economies based on that system.
Exchanges were always interested in making money. But, the seat holder owned exchanges thought of the exchange service somewhat as a utility. It was not seen so much a profit making business. As a result, they viewed the exchange as a way to facilitate their business.
But that all changed when new owners had different ideas. First, they expected their investments to produce profits. Seeing the exchange as a profit making opportunity rather than a mutual service or utility was a radical change in thinking. And that change immediately put pressure on management to produce more exchange profit.
New ownership shifts how NYSE plays the game
The disruption of seat holder comfort happened with new owners in 2006. After centuries of raising and placing capital things were changing. Until then operations had been about providing utility and service. But now, while the capital markets continued, the selling ownership to the public changed things. One result was stock exchange seat holder ownership became a footnote of history.
NYSE became one more corporation listed on the stock market. As a result, in fact the biggest change made was that exchange management became accountable to new investor shareholders. And those shareholders expected a return on investment. One big change was none had access to the exchange as a business opportunity. Rather, they expected the exchange itself to produce profit. They did not buy shares to have the right to operate their own business within the exchange as seat holders had.
That was a radical shift and immediately changed the culture. Soon shareholder owners were clearly directing management to search for new revenue and profit. Many new ideas followed and some grew to become radical changes. Among those changes were ones that tilted markets to favor HFT over investors.
High frequency trading accepted by NYSE
Few investors realized the investing world shifted when the NYSE signed contracts with HFT. That change was immediately seen as a seal of approval. Such is the case with accepting and being in business with the wizards developing HFT. As a result, once the NYSE accepted and became open to doing business with HFT the implied or unofficial but universal approval came to be.
Frank Sinatra may very well have sung the implied endorsement
“...if HFT can make it here, it can make it anywhere...”
Generally speaking, when New York accepted HFT, it accelerated across almost all markets!
When regulators did not react to NYSE accepting and making changes that favor HFT, it seemed the fix was in! In fact, acceptance of HFT by the NYSE was a watershed moment in stock market history. Suddenly investors were on the menu as exchange management decisions had the outcome of feeding investor orders to HFT. After the implied endorsement HFT grew to become a part of virtually all markets across the globe. Except China.
Greed and secrets change markets
As everywhere and through all time, things change including in stock markets. Among the changes, technology, regulation and greed combined to change stock markets. That combination of forces let HFT change the historic purpose of stock markets. Now, a cascade of events and customs got us here and repurposed stock exchanges.
Stock market shifts to profit by any legal means
With regulators remaining passive when stock exchanges changed to favor HFT over investors. It was open season on investor orders. One result, without fanfare, regulators and exchange management accepted the changes. In fact, investors did not even get the courtesy of a heads up that their orders were now being served to HFT! One outcome was that with rapid growth, newly supported HFT shifted the basic purpose of markets.
HFT firms blossomed to become the most important customers of stock exchanges. As a result, displaced listed companies and investors were no longer the prime market customers. So the purpose of the markets was less utility and more that of profit seeker.
Using exchange activity as the prime money maker rather than serving as a capital utility became the prime activity. Justifies as making money by any means became the prime revenue and market generator. For the first time ever, the capital needs of listed companies or investors moved to a secondary role. Once exchanges found the best way to make money was supporting HFT activity capital needs of former prime uses became less impo rtant. As a result of that support, clipping of money from investor orders became a major industry.
Without notice, that new way to make money changed markets and investing. Both regulators and stock market management have never accepted that anything was wrong. They recognize no obligation or responsibility beyond making money. At no time was any effort made to inform or consult the public, listed companies or investors.
2008 Financial crisis, market meltdown and high frequency trading
New owners pushed management to produce more profits leading to more market remaking decisions. Once the 2008 financial crisis happened the rules were rewritten again. Responses to at market plunge completely opened stock market doors for HFT. As never before, markets became tilted in favor of HFT. Now, HFT became fully embraced as a core exchange activity.
The changes made produced a gush of cash. As market management pointed to huge revenue increases as justification for the changes, investors got no consideration. Indeed, market managements fully embraced HFT to continue taking a share of the cash torrent. Quickly both exchange profits and inside players were seen as on top and well ahead of any investor needs. In fact, without investors knowing they were the meal, management was contented to feed their orders to HFT. By embracing HFT, management decisions also spread the costs broadly across investors and traders like a tax investors paid although they did not know it existed.
The financial crisis story - a short version
Responses to the 2008 financial crisis are central to the story of HFT success triggered by NYSE management decisions. So to be sure you have an understanding of that crisis, following is a short version of a very long and complex story.
In September 2008, the financial world stopped. First, financial dominoes fell one after another. It began with a credit freeze. Once the U.S. subprime mortgage market failed, a credit freeze happened. In brief, the failure happened because house prices stopped going up. Indeed, once that set off a cascade of mortgage defaults, those defaults triggered a huge banking crisis.
Stock market traders responded to the mortgage, credit and banking crisis in panic. Immediately markets plunged. One after another the crisis spread in an electronic flash around the world. Everywhere, markets sank, credit froze and investors gasped!
While the financial world changed in response to the financial crisis of 2008, the stock markets were on the front line of the fallout. Included were changes in stock market operations and structure. Not only do some changes favor HFT over the interests of listed companies and investors, those changes set investors up to pay costs due to HFT! In effect, investors began to pay a tax to HFT schemers.
The crisis in summary:
2008 financial crisis grew from subprime mortgage mess to threaten a credit freeze.
DOW crashed 777.68 points on Sep. 29, 2008
Markets around the world all fell.
DOW falls 54% from Oct 9, 2007 to Mar 5, 2009.
Financial crisis triggers The Great Recession.
The cold hard credit freeze truth
Faith is the heart of all credit. Our faith, our trust. Anyone living above a subsistence level uses credit. It is at the heart of the financial system. In essence it flows from ourselves to every company and our country, we all operate on credit. But also, It is normally based on the expectation that we get paid and expect to pay.
So it works for you and me and everyone else, until it doesn't! And when they don’t credit disappears. It freezes! If or when that happens across countries, financial activity and economies stop. In essence, that was the situation the world faced in September 2008!
Should it all stop we all stop any economic activity. It all stops when no one believes or trusts that they or their bank can or will get paid. Like everyone else, they stop doing business. And they stop working or shipping or delivering of making or offering goods and services. So, business and finance stops and as the slowdown happens fast and spreads fast, we all stop. That was the case in Sept. 2008 when economic activity everywhere quickly slowed. Once the slowdown happened rolled through the ecomomy and and became what is now known as the Great Recession.
Lehman Brothers Bankruptcy
Lehman Brothers, a major financial player on Wall Street, got caught by the falling financial dominoes. At the time, they were a big bank in big trouble. Unlike other banks, they were known on Wall Street for their aggressive and antagonistic market behavior. One side effect of their history of rough play was they had few friends and no allies.
When the financial wagons circled, they were on the outside looking in. As a result, Lehman received no help, no relief and collapsed, bankrupt. In essence, that turned billions of dollars to smoke. In a flash, thousands of jobs evaporated. In response fear ran rampant through global banking, credit markets and all stock markets.
Imagine, banks did not trust banks! Instantly, credit and trading stopped everywhere! Forthwith, our capital world of interdependent banking needed rescue. And that had be fast innovative action or bank after bank would topple.
Market liquidity vanishes
For stock markets an immediate and direct result was liquidity vanished. One result was market volume went close to zero! It happened because share trading all but dried up. Buyers disappeared because few had the courage to trade or invest. Markets stopped.
Anyone interested in trading wanted to sell and raise cash. But there can be no sellers without buyers. One always needs the other for markets to function. And both need trades to happen in volume. For markets to work, volumes of both transactions and shares are needed. In liquid markets, buying or selling is fast and easy. And with speed and ease, cash can move in or out of a liquid market as buyers or sellers exchange positions without causing big price moves.
All that changes with little or no volume. That change means little trading activity, few buyers and sellers and those that come have difficulty exchanging positions. Any that try can move prices on low volumes. As a result, with little or no liquidity, moving cash in or out of markets becomes difficult. In short order, all buyers disappear.
To restore that needed liquidity, exchange management responded by feeding investor orders to HFT for promised liquidity. Exchange managements drank the HFT Kool-Aid!
Three wise men crush the crash
In the September 2008 crash, salvation came from effective leadership. That leadership came from the minds, actions, knowledge and experience of the three wise men of the 2008 financial. Included in the elite group included Ben Bernanke, Hank Paulson and Warren Buffet.
Ben Bernanke was then Chairman, U.S. Federal Reserve Bank, the FED. And he was also an economic expert on the depression. The depression was the economic downturn triggered after the stock market crash of 1929. Ben Bernanke knew massive injections of cash was the only way to prevent a repeat of the sorry depression history.
The second wise man, Treasury Secretary Henry “Hank” Paulson, grasped the scale of the issue and had the courage to take some necessary, although very unpopular action. And the third wise man, Berkshire Hathaway CEO, Warren Buffett, phoned in his brilliant and practical suggestion to save the f inancial system.
In normal circumstances, U.S. government programs can buy bank assets in exchange for cash. Such programs play an important supporting role in the economy and banking system. But in the 2008 crisis there was massive need for cash and credit beyond what had ever been considered. In fact, the needs across the economy were orders of magnitude beyond anything ever seen before.
Brilliant simplicity - force feed cash!
The Buffett suggestion was brilliantly simple. Act to put massive amounts of cash into banks. It was to force feed the capital, in the form of cash. By doing that rather than having the FED buy assets in exchange for cash, that put liquidity across the country where it was needed. All that sounds subtle and simple but is dazzling clear and on target. It puts cash were needed in crisis. That force feeding put massive amounts of cash into the banking system and economy. It was innovative, clever and simple but had never been tried before.
Just forcing cash in was radical, even outrageous but courageous new thinking. By pushing cash into the system, the normal process changed. Rather than having the bank assets be exchanged for cash, they just got cash in quantity.
Warren Buffett had the vision to know such a force feeding of cash into banks and the economy was essential. It was the only way to quickly get past the credit freeze and crisis. In fact, he knew 2008 was no ordinary crisis and needed extraordinary solutions.
U.S. President got it right
George W. Bush, U.S. President at the time of the 2008 financial crisis, played an important role during the crisis. In addition to Buffett, Bernanke and Paulson, the President must be given credit for listening to their advise. So to be fair and give due credit, U.S. President George W. Bush both understood and supported the radical actions recommended by the three wise men and took their advise.
All involved knew such proposals and actions would be very unpopular with the public. The public would see it as a government bailout of greedy bankers. Layoffs, foreclosures and bankruptcies touched the assets of millions of regular people. Many would see force feeding cash to banks as unfair action when it was people who needed help.
But the public got no direct help. As expected, there were howls of protest but the program proceeded. In time that ultimately became good news that worked for the economy! However, much bad news remained. In fact, millions suffered severe financial losses as part of the collateral damage. That damage included many investors. However at that time, few knew they too were victims. In essence all investors became victims when markets were changed to feed investor orders to HFT for promises of liquidity.
$250 Billion force feeding saves the world!
The U.S. government plan began and grew into a massive $250 billion push into the banking system! Understandably as expected, that was a very unpopular political dud. But, although unpopular, it was effective. It saved and defended the U.S. economy by pumping essential financial lubrication as cash into a seized system. That lubrication worked, and that in turn defended the global economic system. All stories were not happy as there was much pain. But for the banking and financial system, it worked! And that saved America and supported the world economic and trading systems. The alternative was worse, a depression.
The quick and continued massive action thawed credit. As a result, the economy began to work again. It was fine minds, courageous leadership and understanding of complex financial strategies that stopped an economic collapse. Above all it was the action taken that mattered. Afterward, solid leadership action pointed the economic way forward. Governments and banks around the world followed with their own stimulating actions.
Getting stock markets past the 2008 crisis
Stock markets got rocked to their core by the upside down world of the 2008 financial crisis. After that shock and searching for a way forward, managements of all exchanges looked for ways to bring back traders and investors. And by seeking new ways to find revenue and profits, managements were looking inside and outside for ideas.
In several ways, the NYSE is the world's leading exchange and most influential stock market. It was the heart of capitalism. But what were they going to do? Not only did they confront their past, they considered all solutions. That included considering how other exchanges used, managed and benefited from technology. They gave each one a careful look.
Dire circumstances forced a fast transition to move beyond human to electronic trading. As well they investigated how other exchanges used rebate incentives to find volume. Then, for the first time ever, exchange management considered offering incentives for volume.
After the 2008 financial crisis the ground shifted for investors. When exchange managements were seeking volume to get markets moving, promises of liquidity were appealing. Like all exchanges under such pressure, they were receptive to making changes. However, the resulting fixes put in place gave HFT an edge over all investors.
Secret betrayal by an investing ground shift
Only very well informed traders were aware of HFT. Few others were aware of HFT or what impact it could have on their investments. With few exceptions, investors from small individual accounts to large national fund managers knew that HFT existed. None fully grasped the impact of HFT. Without notice there was a secret betrayal by a ground shift for investing and investors.
Even sophisticated large fund investors with the most current technology did not know how HFT impacted their funds. And although very sophisticated investors and well aware of computerized trading, they were on the outside when it came understanding HFT. In that case, they had no grasp of how the inside fix supported HFT, rigged stock markets while feeding their orders to these new market predators.
At a time when the FED and the U.S. Treasury managed to pull the economy back from the brink, HFT wizards stepped up to feed on investors. Once markets bought the liquidity potion from the HFT wizards the fix was in. Suddenly in exchange for healthy streams of fees, exchange managements eagerly sold HFT access of the orders of investors.
In major markets HFT grew to become the major source of trades! In short order markets attracted numerous HFT firms keen to clip investor orders. Without delay they feasted on any investment market order. Then, when the secret got spilled in media reports, HFT firms produced a curious mix of responses. Above all, misinformation was the leading response of HFT to having their scheme exposed. Lesson 11 covers the misinformation scheme.
Thinking of mice, men and desperate decisions in crisis
Reviewing decisions made in crisis brings to mind the Robert Burns poem, To a Mouse.
His famous line,
"...the best laid schemes of mice and men often go awry...",
as in go askew or bad.
The financial crisis presented an extreme crisis to stock exchange management. One result was decisions made then helped entrench HFT deep inside stock markets. As a result of those changes, rigged stock markets contin ue to favor HFT over investors.
Change exploited for high frequency trading advantage
Changes made by exchanges produced results for HFT. One outcome was that in turn both markets and investors also got results. But those results were not as favorable. In essence, the outcome and consequences for markets, the economy and society were less favorable. In particular, fundamentals like fairness, truth and transparency got left behind by changes that favor HFT. Even though the facts and consequences seem to get past all decision makers, regulators seem to be in a trance when it comes to HFT. Still, no exchange management, regulators or any financial service provider has raised serious objections. Seemingly as always, investors, never made aware in advance, ever got asked.
As a result, the stock market effect of all the changes together was historic. In fact, they provided the perfect setup for management of every stock exchange to profit. Even if they all fell for the magic and benefits promised by HFT wizards, they seem unable to see tilted markets. In short they seem to accept the HFT promises as fair exchange for delivering investor orders to HFT.
Accordingly, that produces billions of dollars of loot but with none of it for investors! Until investors force the question of truth and transparency back on markets, it seems little will change. That it happened almost seems a bit old fashioned! Especially so when offering profit as acceptable justification for any stock market action, fair or foul.
Now You Know:
Market management burns investors
The lesson exposes the decisions and actions of stock market managements that put in place changes that transformed markets and investing. Because investors can learn how management decisions changed markets and investing, they can prepare to change how they invest. Doing that can change investing and defend their investments from these threats to wealth building. That knowledge helps you prepare to transform how you invest. With the knowledge gained in this lesson you have the background to understand how stock exchange managers changed markets to favor HFT. The lesson, Management burns investors, shares superior investor knowledge. This lesson is sourced from the Ultimate Guide To Stock Market Investing Success by White Top Investor.
You also know the answer to the question:
Do stock markets support high frequency trading?
Managements of stock markets made changes feeding investor orders to HFT. Those changes were in the structure and operations of stock markets. So beginning with those management made structural changes as well as several lucrative fee attracting changes were done that favored HFT. It was those changes that sealed the fate of investor orders by making them available for HFT to easily fed upon. Those changes tilted markets against investors. And that market tilting transformed markets and investing.
In addition you know these lesson takeaways from,
Market management burns investors:
Stock market management burns investors with market tilting changes favoring HFT. Included are structural changes made by exchange management that sealed investor fates by serving their orders to HFT. It became a tipping point once the NYSE changed in response to the 2008 financial crisis. As a result, markets and investing changed. When changes favoring HFT happening on the NYSE, virtually all major markets followed.
- NYSE looked to as leader among stock exchanges.
- 2006 new NYSE ownership demands more profit.
- FED and U.S. Treasury respond to the 2008 financial crisis.
- 2008 NYSE responses to financial crisis changes markets.
- HFT accepted by NYSE and virtually all exchanges.
- Markets use liquidity cudgel to beat investors.
- Management decisions burns investors favoring HFT.
You may like lessons related to: Market management burns investors
Learn how to begin building your investor mind here: The Investor Mind.
Irrational behavior in normal markets
Investors hear FED direction signals
Markets spark interest in interest!
Mortal investors see immortal debt
3 Portfolio building success keys
Optimism and unrealistic investor minds
FED begins Quantitative Tightening
Comment or ask questions on,Market management burns investors
You can email me at [email protected].
And subscribe for free to get White Top Investor lessons in your inbox!
Make money work for you by knowing how investors think, feel and act. Begin building your investor mind here: The Investor Mind.
White Top Investor lessons, website layout and organization: click here.
Make money work for you
The lesson, Market management burns investors, shares superior investor knowledge. That knowledge helps you become a more comfortable and confident investor. And you can use White Top Investor lessons to learn investing at your own pace. By learning one step at a time you can master your financial security and independence. And White top Investor never sells or shares our email list. Click to Learn more.
High frequency trading explained, lesson links:
Introducing high frequency trading explained Lesson 1
Racing for profits drives high frequency trading Lesson 2
Markets and technology built HFT Lesson 3
Technology powers high frequency trading Lesson 4
High frequency trading secrets exposed! Lesson 5
Laws and ethics beat investors Lesson 6
Market management burns investors Lesson 7
High frequency trader 3-Way ambush Lesson 8
Fair and foul high frequency trading Lesson 9
High frequency trading strategies, risks and regulations Lesson 10
Misinformation myths of high frequency trading Lesson 11
Markets technology and laws respond to high frequency trading Lesson 12
Investors deal with high frequency trading Lesson 13
Next lesson, course 510 lesson 8:
High frequency trader 3-way ambush
Let’s connect, follow here; Twitter LinkedIn Facebook
Share:
Market management burns investors
Buttons below let you share this lesson with family and friends!
Now, it’s your turn! Apply the lesson: Market management burns investors
Begin applying your new knowledge at your own pace. Taking the time you need to understand the lesson, helps you master the material. Then you can apply what you learned to take another step in your development as a superior investor. Have a prosperous day!
Image courtesy: Unsplash.com
WhiteTopInvestor.com
