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Ron Insana On HFT

Ron Insana On HFT

Hey Ron, didn’t realize your new position as a contributing editor on CNBC came with the contributing title of “Portfolio Manager.” Didn’t Stevie put a one year kibbosh on that? But I digress… And in all honesty I am surprised that you seem to have the correct spin on things (as per letter below from Jim Cramer’s failed media experiment TheStreet). When you say:

I’d prefer that regulators look into whether a firm like Goldman Sachs (GS) unfairly view [sic] order and information flow ahead of its customers and clients.

we are pleasantly surprised… Yet when you follow up by saying:

But the press won’t touch that topic

we are totally ecstatic that you do not lump us into the definition of that derogatory word. Then again, feel free to do a search for “Goldman Sachs” here. Even an erudite portfolio manager such as yourself may learn a thing or two.

High-Frequency Distraction

By Ron Insana

Portfolio Manager

7/27/2009 11:40 AM EDT

The New York Times and The Wall Street Journal are taking aim at a new form of computerized trading known as “High Frequency” trading. The algorithm-based trading is allegedly an illegal form of front-running, as high-frequency traders hook into exchange computers and use “flash trades” to suss out incoming order flow and use the lightning speed of their own programs to jump ahead of customer orders. Critics argue that individual investors are at a distinct disadvantage for this reason and a variety of others. The proximity of high-frequency computers, which can be placed next to exchange computers for a fee, allows for an almost-osmotic transfer of information. Senator Charles Schumer (D, N.Y.) is asking the SEC to ban “flash trades,” which are phony orders placed by high-frequency programs that aim to fool market participants into entering orders. The programs jump in front of customer orders and gain a trading advantage. If that is indeed what is happening, it qualifies as “front-running,” an illegal practice on Wall Street. If high-frequency traders are just faster than everyone else and not illegally jumping in front of others or paying off the exchanges to get preferential trading treatment, then this new area of technology-based trading is no less legitimate than the use of the telegraph, the telephone, the ticker, computers, handheld devices or older-style “black box” or “dark pool” programs that give sophisticated traders the ability to simply trade faster. I’d prefer that regulators look into whether a firm like Goldman Sachs (GS) — whose former executives continue to run the New York Stock Exchange (NYX) ; advised on the merger between NYSE and Archipelago, and formerly owned a portion of the combined entity; own Speer, Leeds & Kellogg, the largest specialist firm on the Big Board floor; and control the greatest number of seats in the equity markets — unfairly view order and information flow ahead of its customers and clients. I am far more concerned about that than I am about the emergence of “high-frequency” trading. But the press won’t touch that topic. It’s easier to go after the dreaded speculators and dark pool traders than lose access to the most profitable and prestigious firm on Wall Street.


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