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When the average investors leave the market because of this, front running (http://en.wikipedia.org/wiki/Front_running http://en.wikipedia.org/wiki/Front_runnin

When the average investors leave the market because of this, front running (http://en.wikipedia.org/wiki/Front_running http://en.wikipedia.org/wiki/Front_running), , and the fact that small number of firms (~400) is involved in 70% of the US trading volume (http://www.ft.com/cms/s/0/a5f03366-6d69-11de-8b19-00144feabdc0.html http://www.ft.com/cms/s/0/a5f03366-6d69-11de-8b19-00144feabd...), will they ever come back?

tptacek 17y ago
The average investor accesses the equity market through mutual funds, which are large institutional investors that can compete with high frequency traders. If stuff like this keeps my uncle-in-law out of daytrading, I see that as a feature, not a bug. There are markets where the entire order book is transparent, and the bulk of investment dollars don't even go to equities. Hard to see this as the end of the world.
- stuffthatmatter 17y ago
  True, but stories like this makes them pull out of equity funds and into bond funds.
  - BrentRitterbeck 17y ago
    Every single asset class experiences some firm using some software to effect some strategy. Moving into bond funds wouldn't eliminate exposure to Wall Street's technology.
  - tptacek 17y ago
    You can't even invest in frozen concentrate orange juice without dealing with scalpers.
BrentRitterbeck 17y ago
The average investor is not going to leave the market. I spent time as a retail broker, and the truth is most have no idea what they were doing to begin with. I don't think this is going to persuade them to stop.
- roc 17y ago
  They're not going to leave because they can't. Their 401ks, IRAs and the like only work as tax shelters if they invest and (for the most part) they don't even have a choice of which firm they work with. So long as the firms don't skim more than the tax benefit is worth to the average investor, it's still in the investor's best interest to keep contributing.
- stuffthatmatter 17y ago
  Those investors (no idea what they were doing to begin with) already got spooked by the 60% drop and pulled out of 401k/into bonds. I mean the average investors who have some knowledge of the market, and have decent capital (20k-200k) but is just trading normally using online trading services.
  - BrentRitterbeck 17y ago
    Trust me, they don't leave. There's something about the markets that make people think that they can compete against a firm with a multi-billion dollar IT department, a slew of economists, and direct access to the exchanges. I'm not denying that the game is in favor of Wall Street firms. I'm simply saying that this will not cause retail investors to exit the market.
JSick 17y ago
Front running is illegal and is regulated (Rule 92 - also called the "Manning" rule I believe). This should not be keeping average investors away from the markets today. To refute your second point, there are probably more firms trading today then there ever were before. It's really an economy of scales issues. The large firms have the capital and the resources to: lease fiber lines, buy servers, and hire analysts/developers to build the systems required to be an efficient player in the market players. Many smaller firms simply employ the services offered by these institutions. To reply to a previous point, the article is very biased and tells a small part of the story. Most of the noise in the media and in blogs today about HFT is very one-sided. The fact is that these HF proprietary trading systems which trade on behalf of the big wall st firms are competing against similar systems offered as "algorithms" to the Institutional investors. To use an example, a mutual fund manager will try to buy 100,000 shares of IBM. That fund manager will go to an investment bank and route his order through a VWAP Algorithm. That Algorithm may be competing in the market against the same investment bank's HFT Black Box trading app. These two "Algos" don't know about each other due to "Chinese Wall" restrictions. I digress. Bottom line is that these systems which are "gaming" the market are competing against similar systems which aim to prevent such practices. The playing field is much more level than the author leads his audience to believe. Hope that offers some insightful perspective.
- tptacek 17y ago
  Rule 92 is NYSE, Manning is FINRA, and both --- if I understand them correctly --- apply mostly to traders trading for themselves against their customers interests. (NB: this is just Google research).
Dilpil 17y ago
Keep in mind that 70% of trading volume is not at all the same thing as 70% of all the money in the system.

tptacek 17y ago

The average investor accesses the equity market through mutual funds, which are large institutional investors that can compete with high frequency traders. If stuff like this keeps my uncle-in-law out of daytrading, I see that as a feature, not a bug. There are markets where the entire order book is transparent, and the bulk of investment dollars don't even go to equities. Hard to see this as the end of the world.

stuffthatmatter 17y ago
True, but stories like this makes them pull out of equity funds and into bond funds.
- BrentRitterbeck 17y ago
  Every single asset class experiences some firm using some software to effect some strategy. Moving into bond funds wouldn't eliminate exposure to Wall Street's technology.
- tptacek 17y ago
  You can't even invest in frozen concentrate orange juice without dealing with scalpers.

BrentRitterbeck 17y ago

The average investor is not going to leave the market. I spent time as a retail broker, and the truth is most have no idea what they were doing to begin with. I don't think this is going to persuade them to stop.

roc 17y ago
They're not going to leave because they can't. Their 401ks, IRAs and the like only work as tax shelters if they invest and (for the most part) they don't even have a choice of which firm they work with. So long as the firms don't skim more than the tax benefit is worth to the average investor, it's still in the investor's best interest to keep contributing.
stuffthatmatter 17y ago
Those investors (no idea what they were doing to begin with) already got spooked by the 60% drop and pulled out of 401k/into bonds. I mean the average investors who have some knowledge of the market, and have decent capital (20k-200k) but is just trading normally using online trading services.
- BrentRitterbeck 17y ago
  Trust me, they don't leave. There's something about the markets that make people think that they can compete against a firm with a multi-billion dollar IT department, a slew of economists, and direct access to the exchanges. I'm not denying that the game is in favor of Wall Street firms. I'm simply saying that this will not cause retail investors to exit the market.

JSick 17y ago

Front running is illegal and is regulated (Rule 92 - also called the "Manning" rule I believe). This should not be keeping average investors away from the markets today. To refute your second point, there are probably more firms trading today then there ever were before. It's really an economy of scales issues. The large firms have the capital and the resources to: lease fiber lines, buy servers, and hire analysts/developers to build the systems required to be an efficient player in the market players. Many smaller firms simply employ the services offered by these institutions. To reply to a previous point, the article is very biased and tells a small part of the story. Most of the noise in the media and in blogs today about HFT is very one-sided. The fact is that these HF proprietary trading systems which trade on behalf of the big wall st firms are competing against similar systems offered as "algorithms" to the Institutional investors. To use an example, a mutual fund manager will try to buy 100,000 shares of IBM. That fund manager will go to an investment bank and route his order through a VWAP Algorithm. That Algorithm may be competing in the market against the same investment bank's HFT Black Box trading app. These two "Algos" don't know about each other due to "Chinese Wall" restrictions. I digress. Bottom line is that these systems which are "gaming" the market are competing against similar systems which aim to prevent such practices. The playing field is much more level than the author leads his audience to believe. Hope that offers some insightful perspective.

tptacek 17y ago
Rule 92 is NYSE, Manning is FINRA, and both --- if I understand them correctly --- apply mostly to traders trading for themselves against their customers interests. (NB: this is just Google research).

Dilpil 17y ago

Keep in mind that 70% of trading volume is not at all the same thing as 70% of all the money in the system.