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It's been just over three weeks since the July 3rd arrest of former Goldman Sachs IT executive Sergey Aleynikov inadvertently blew the lid off the intricacies of exactly how those great vampire squids on Wall Street manage (no past tense here) to suck Main Street dry.

(Actually, come to think of it, that didn't take long at all.)

The high frequency trading ("HFT") scam on Wall Street is being exposed to the masses as we blog.

And, at least to some degree, it is because we blogged and it is because we took the time to spell out the details of this story in obscure trade magazines, and not-so-obscure larger media outlets, that this is happening now.

The NY Times' Tobin Harshaw provides what may be the very best--and pretty damn even-handed, too--roundup of current commentary on the matter in today's NY Times: "Weekend Opinionator: 'Is Wall Street Picking Our Pockets?'."

Referencing and then quoting stock market guru Karl Denninger, Harshaw first refers to yesterday's major milestone of a piece in the NY Times, by Carl Duhigg: "Traders Profit With Computers Set at High Speed."

Then Harshaw paraphrases Denninger:

Karl Denniger at the Market Ticker writes that Duhigg has "blown the cover off the dark art" but thinks that the traders' computer speed isn't most important advantage they have. Rather, he says, the "algos," rather than providing liquidity as they are supposed to, intentionally probe "the market with tiny orders that were immediately canceled in a scheme to gain an illegal view into the other side's willingness to pay..."

And, Denninger spells it out for us, in language that anyone who's ever been outbid on eBay could understand:

Let's say that there is a buyer willing to buy 100,000 shares of BRCM with a limit price of $26.40. That is, the buyer will accept any price up to $26.40.

But the market at this particular moment in time is at $26.10, or thirty cents lower.

So the computers, having detected via their "flash orders" (which ought to be illegal) that there is a desire for Broadcom shares, start to issue tiny (typically 100 share lots) "immediate or cancel" orders - IOCs - to sell at $26.20. If that order is "eaten" the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.

Now the flush of supply comes at, big coincidence, $26.39, and the claim is made that the market has become "more efficient."

Nonsense; there was no "real seller" at any of these prices! This pattern of offering was intended to do one and only one thing - manipulate the market by discovering what is supposed to be a hidden piece of information - the other side's limit price!

With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit. But the computers are so fast that unless you own one of the same speed you have no chance to do this - your order is immediately "raped" at the full limit price ... as the fill price is in fact 30 cents a share away from where the market actually is.

A couple of years ago if you entered a limit order for $26.40 with the market at $26.10 odds are excellent that most of your order would have filled down near where the market was when you entered the order - $26.10. Today, odds are excellent that most of your order will fill at $26.39, and the HFT firms will claim this is an "efficient market." The truth is that you got screwed for 29 cents per share which was quite literally stolen by the HFT firms that probed your book before you could detect the activity, determined your maximum price, and then sold to you as close to your maximum price as was possible.

And, let us not forget who/what originally ignited the flames of Karl Denninger's highly-respected wrath just a couple of weeks ago: "DKos Diary Reverberates Throughout Wall St. (w/update)," which was all about this DKos diary, "'Incredibly Shrinking Liquidity' as Goldman Flushed Quant Trading," which also generated (among hundreds of other market pundits' comments) this: "*FLASH* Goldman Code Theft BOMBSHELL?"

Wednesday, July 8. 2009
Posted by Karl Denninger in Regulatory at 15:03
*FLASH* Goldman Code Theft BOMBSHELL?

Something really ugly popped up on Daily Kos yesterday late in the afternoon.....


God help Goldman if this is true and the government goes after them...


God help our capital markets if this is true and is ignored by our government and regulatory agencies, or generates nothing more than a "handslap..."


There apparently is reason to believe that Sergey might have been involved in exactly this sort of coding implementation.  Specifically, look at the patent claims cited on DailyKos; his expertise was in fact in this general area of knowledge in the telecommunications world......


The charge made on the pages of Daily Kos is incredibly serious.  If this happened it is a case of literal robbery of every market participant for the entire duration of the time that the code in question was executing on the network, with losses to market participants potentially running into the hundreds of billions of dollars.

So, if you aren't convinced that the story about the biggest ripoff ("legal" or otherwise, IMHO, it is still a ripoff) of the public in history  is finally seeing the light of day, check this latest development out...

We now know, beyond any doubt, that this is a big story simply because anytime there's a great press opportunity in New York--especially when it's about anything bankster-related--Senator Wall Street, himself, writes a letter and then issues a press release about...writing a letter: "Schumer Asks SEC to Ban Flash Orders Used by High-Speed Traders."

Schumer Asks SEC to Ban Flash Orders Used by High-Speed Traders
By Edgar Ortega and Eric Martin

July 24 (Bloomberg) -- Senator Charles Schumer asked the U.S. Securities and Exchange Commission to ban "flash orders," saying the transactions give high-speed traders an unfair advantage over other investors.

Nasdaq OMX Group Inc., Bats Exchange Inc. and Direct Edge Holdings Inc. hold these orders for milliseconds, giving their customers the opportunity to gauge demand before traders on other exchanges get the chance to bid, Schumer said in a letter to SEC Chairman Mary Schapiro. Brian Fallon, a spokesman at Schumer's office, confirmed the authenticity of the letter.

"Flash orders allow certain members of these exchanges to obtain access to order flow information before that information is made available to the public," Schumer wrote. That allows "those members to use rapid trading programs to trade ahead of those orders and profit from advanced knowledge of buying and selling activity," he added.

The senator said that if the SEC doesn't prohibit flash orders, he will introduce legislation that would.

One might ask if Senator Schumer's current bloviations are just a pre-emptive smokescreen to stall or prevent more aggressive efforts by law enforcement officials going forward; IMHO, it's a legitimate concern. But, the point is, it's only been three weeks since this story started along its twisted path just to get to where we are today.

So, yeah, from a political standpoint, apparently Senator Chuck heeds the comments of that oft-quoted and highly-influential, former Dresdner Kleinwort honcho when he said those famous words: "You never want a serious crisis go to waste."

If nothing else, this exercise over the past few weeks has reminded us that this advice is very much a double-edged sword. As Progressives, and as bloggers,  as well as small- and big-time (and, admittedly biased) journalists interested in furthering our righteous cause(s)--with increasing unemployment, a healthcare crisis, an economy in shambles, blatant and egregious violations of basic human rights and a myriad of other critical topics bubbling to the top of the MSM--we should all heed those words, as well.

Originally posted to on Sat Jul 25, 2009 at 12:18 PM PDT.

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