High frequency trading is putting your retirement savings at risk every day. It is taking advantage of and really hitting the market where it is the most vulnerable. Within milliseconds, we can lose our money just like we saw in the 2010 Flash Crash.
Now let me talk a little bit about the concept high frequency trading so you understand what’s happening. Right now stock XYZ is at $20 a share and there is no special news about it, or price movement. A large institutional investor such as a mutual fund decides it wants to sell a large portion of its holding and sells 2 million shares. This cause a slight, temporary dip in the stock causing it to drop to $19.50. High frequency traders take advantage of this dip and buy the stock before it stabilizes only to resell it once it levels back out to $20 or higher. Who does that hurt? Everybody else. Billionaire investor and host of Shark Tank, Mark Cuban calls high-frequency traders “hackers. “That got me looking further into issue of high-frequency traders. They are the ultimate hackers. They’re running software programs that have one goal, and that’s to exploit the trading systems as early and often as possible,” Cuban said in an interview. (Full interview)
What is the Flash Crash?
Some of you have heard of Flash Crash. When this happened, it freaked me out. For the last five years, I’ve been watching the market and watching what’s going on because my goal has been on trying to create a 401k without stock market risk. When I saw this, my jaw dropped. It was very hush hush. What happened: in the matter of five minutes, the stock market dropped 10%. Five minutes. Mysteriously dropped. It happened in 2010 and they called it the Flash Crash. Nobody really knew what happened. They said, “We’re going to investigate who it is, and it’s probably somebody had a fat finger and they pushed the wrong key on the sale and the trade.” Later on, they came out and said that there was a company that had a wrong algorithm software code. In other words, one trade from one computer led to a trade made by another and so on. It basically triggered a domino effect.
The Flash Crash was not the result of a “fat finger” or a computer glitch—it was caused by a high frequency trading program. Earlier this year, someone was finally arrested for causing the Flash Crash. They arrested a 30-year-old kid in London working out of his house who bought a software program and basically hacked the market.
There’s no doubt he was involved in this because he had called one of the big fund managers about a month earlier and they have records of him calling in and saying, “Would you have a problem if I did this?” They said, “No.” If you read the report, he basically figured he had the green light to do it. I don’t think he was the only one involved in this. I think he was just the only that got caught which made him a good scapegoat for high frequency trading.