The Matrix, But With Money

28 Jul 2009

Experts guess that between 60 and 75 percent of the NYSE’s daily trading volume is just computers trading against one another using a variety of strategies. Recent HFT investigations by Donefer, Themis Trading, and sites like Zero Hedge have brought to light a lively ecosystem of algorithms, or “algos” in the parlance, that use ECNs in different ways to make money.

What the vast majority of these algos have in common is that they are not long-term, buy-and-hold “investors” in the classic sense. Rather, they focus on executing as many trades per second as possible and on turning a small profit (often pennies or fractions of a penny) on each trade. This combination of high speed, massive volume, and razor-thin per-trade profits adds up over the course of a day, week, or year to some very large numbers.

How the hell is this legal?

Apparently proprietary trading code was stolen from Goldman Sachs earlier this month. US Attorney Facciponti says

there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.

How is it any different from what Goldman – or any other trading company with similar software – could do?