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Reports US

US stock market daily report (March 31, 2014, Monday)

April 1, 2014, Tuesday, 05:02 GMT | 00:02 EST | 08:32 IST | 11:02 SGT
Contributed by Millennium Traders


Michael Lewis, author of a new book available on shelves Monday, "Flash Boys: A Wall Street Revolt" implies the U.S. stock market is rigged in favor of high-speed electronic trading firms who participate in high-frequency trading (HFT). Lewis said on Sunday during airing of "60 Minutes", "They are able to identify your desire to buy shares in Microsoft and buy them in front of you and sell them back to you at a higher price." High-speed electronic trading allows high-speed traders the ability to use their advantages to extract billions from investors.

Lewis, whose books include "The Big Short" and "Moneyball" said, "This speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds."

HFT activities are legal and makes up over half of all U.S. trading volume. HFT firms are highly regulated by the stock exchanges. Many banks and proprietary trading firms use sophisticated computer programs to send large numbers of orders into the market, executing a small portion of them when opportunities arise to capitalize on price imbalances or to make markets. Lewis said HFT firms use their speed advantage to profit at the expense of other market participants to the tune of tens of billions of dollars. These firms rake in phenomenally huge profits using the advantage of milliseconds which make it possible to send around 10,000 orders into the markets, in the blink of an eye. The incredible speed and volume of trades of HFT activity allows traders to successfully make significant profits, many on just fractions of a penny per trade.

Brad Katsuyama, a major figure in Lewis's book and former head trader for the Royal Bank of Canada in New York said he was finding that when he would send a large stock order to the market, it would only be partially filled, and then he would have to pay a higher price for the rest of the order.

Katsuyama, with the assistance from Ronan Ryan, realized his orders which traveled along fiber optic lines would hit the closest exchange first, where high-frequency traders caught a glimpse of the order then, used their speed advantage to beat him to the other 12 U.S. public exchanges and 45 private trading venues. The pair realized HFT algorithms could then buy the shares Katsuyama wanted and then sell them to him, at a slightly higher price.

Katsuyama and Ryan developed a system in which RBC would first send its orders to the exchange that was the furthest away then to the exchange that was closest - last. Their goal for the orders to arrive at all places almost simultaneously, cutting out HFT. Katsuyama told "60 Minutes", "Essentially, our fill rates went to 100 percent. We couldn't believe it when we actually figured it out."

Katsuyama said he will begin a new trading platform, called IEX, for the Investors' Exchange, employing similar tactics to those he used at RBC. Katsuyama said, "It almost felt like a sense of obligation to say we found a problem that is affecting millions and millions of people - people are blindly losing money they didn't even know they were entitled to. It's a hole in the bottom of the bucket.' and added, 'We are selling trust, we are selling transparency, and to think that trust is actually a differentiator in a service business, is actually a crazy thought, right?" Investors in IEX are fund companies and individuals but do not include banks. IEX has attracted the investment of David Einhorn, billionaire owner of hedge fund Greenlight Capital, as well as an endorsement from Goldman Sachs.