海角大神

Insider traders on Wall Street, like the shadowy dons of Mafia lore, have always fascinated the American public.

From Gordon Gekko鈥檚 鈥済reed ... is good鈥� in Oliver Stone鈥檚 鈥淲all Street鈥� to Jordan Belfort鈥檚 rags-to-decadent-riches in Martin Scorsese's 鈥淭he Wolf of Wall Street,鈥� there鈥檚 always been a mix of horror and awe at those bold but nefarious characters who learn to game the system and reap a ton of cash.

But according to a highly publicized book released this week, infamous insider traders like Ivan Boesky are being replaced by a new digital age menace: the algobot.

That is, the algorithmic and automated robot trader 鈥� proprietary software programs that are fast replacing their human counterparts and that now make up half the volume of trades in stock exchanges across America. Referred to as 鈥渉igh-frequency trading,鈥� these algobots can analyze markets and, in the literal blink of an eye, buy and sell thousands of securities.

Controversy about the dangers of high-frequency trading is nothing new. But this week鈥檚 release and relentless publicity of 鈥淔lash Boys: A Wall Street Revolt,鈥� in which bestselling author Michael Lewis claims that parasitic traders armed with lightning-quick computers have 鈥渞igged鈥� the markets in their favor, has re-sparked an often explosive debate on Wall Street.

New York Attorney General Eric Schneiderman, as well as the Federal Bureau of Investigation and the Securities and Exchange Commission, is now investigating the high-tech wizardry of high-frequency trading, which Mr. Schneiderman has called 鈥淚nsider Trading 2.0.鈥�

Mr. Lewis鈥檚 book pays special attention to a particular technique of these savvy automated algorithmic traders, in which they use their superior speed to spot a slower trader about to make a trade. In about the time it takes to click a mouse, the algobot can snatch away the shares other traders are trying to buy, and then offer them back to the traders at a higher price.

鈥淭hey鈥檝e figured out how to front-run market orders,鈥� says Larry Doyle, a former mortgage-backed securities trader who wrote 鈥淚n Bed With Wall Street: The Conspiracy Crippling Our Global Economy,鈥� a scathing critique of Wall Street banks and regulators. Most 鈥渇ront running鈥� is illegal, especially when brokers use information about their own clients鈥� imminent trades to gain an unfair advantage in predicting the market.

But algobots don鈥檛 use client information. They simply 鈥渟ee鈥� other traders preparing to order a stock at a certain price, and in a fraction of a second before they can act, they buy it first. They then sell it back to the original trader at a higher price and collect a transaction fee in what is basically a risk-free technique.

This is not front running, proponents contend. This is just a better and faster way to analyze the market and react. And on Wall Street now, each millisecond is money.

These higher prices are often just a penny or two higher, they say, and the transaction fee is often just a fraction of penny. High-frequency traders make money in the sheer volume of these thousands-per-second trades 鈥� doing it millions of times a day.

鈥淚n general, somebody here has just invested in a better mousetrap,鈥� says Charles Jones, professor of finance at Columbia Business School in Manhattan and an expert on high-frequency trading. 鈥淪o why shouldn鈥檛 they get a return on that better mousetrap?鈥�

These better mousetraps may actually be making the markets more efficient, cutting trading costs and creating greater 鈥渓iquidity鈥� in the markets 鈥� that is, more cash to spend on investments.

鈥淏id-ask spreads are far smaller for most stocks,鈥� says Professor Jones, who has analyzed the effects of high-frequency trading. 鈥淵ou won鈥檛 pay more than a penny in terms of a markup to buy a share or sell a share. It鈥檚 amazing if you think back to where we were 20 years ago. And commissions, they鈥檙e all under $10 for as many shares as you want to trade.鈥�

He adds, 鈥淪o in a sense, there鈥檚 never been a better time to be a retail trader than in this automated world with high-frequency traders.鈥�

Even firms who do not use algobot trading have risen up to support the technique. 鈥淗ow do we feel about high-frequency trading? We think it helps us,鈥� wrote Clifford Asness and Michael Mendelson, executives at AQR Capital Management in Greenwich, Conn., in . 鈥淚t seems to have reduced our costs and may enable us to manage more investment dollars.鈥�

But the smartest 鈥渁lgos鈥� in the room get help, critics say. The big stock exchanges like Nasdaq and the New York Stock Exchange cater to them, offering incentives for high-speed trading in a kind of 鈥減ay to play鈥� system for faster access to market information. 聽

鈥淎s for-profit enterprises, what they鈥檙e trying to do now is, how do we attract volume to our exchanges?鈥� Mr. Doyle says. 鈥淪o the way that they attract volume is, they cut and negotiate deals with different trading entities and these high-frequency traders.鈥�

Such deals include letting companies place computer servers within the exchange鈥檚 trading venues and providing extra bandwidth, ultrafast cables, and high-speed switches for high-frequency traders.

鈥淓ach of these services offers clients a timing advantage 鈥� often in milliseconds 鈥� that allows high-frequency traders to make rapid and often risk-free trades before the rest of the market can react,鈥� . 鈥淎s a result, these traders guarantee themselves enormous revenue and force large investors to develop complicated and expensive defensive strategies to conceal their orders from parasitic traders.鈥�

These defensive strategies in turn have led to the proliferation of 鈥渄ark pools鈥� 鈥� alternative trading venues in which financial institutions can conduct business outside the public exchanges. These defensive and behind-the-scenes trading pools, which attempt to hide from front-running algobots, are far less regulated and have far less transparency. They involve only a few traders agreeing to prices outside the broader market.

鈥淭oday I think we need to revisit some issues relating to this much-litigated and scrutinized territory because we鈥檙e seeing something far more insidious than traditional insider trading,鈥� Schneiderman also said last fall. 鈥淪mall but powerful groups within the market are able to use soon-to-be public information combined with high-frequency trading in a way that distorts our markets far more than ... Ivan Boesky or even Gordon Gekko could ever have imagined.鈥�