(CBS)
It may surprise you to learn that most of the stock
trades in the U.S. are no longer being made by human beings, but by robot
computers capable of buying and selling thousands of different securities in
the time it takes you to blink an eye.
These supercomputers - which actually decide which stocks to buy and sell - are
operating on highly secret instructions programmed into them by math wizards
who may or may not know anything about the value of the companies that are
being traded.
It's known as "high frequency trading," a phenomenon that's swept
over much of Wall Street in the past few years and played a supporting role in
the mini market crash last spring that saw the Dow Jones Industrial Average
plunge 600 points in 15 minutes.
Most people outside of the industry know very little, if anything, about it.
But the Securities and Exchange Commission and members of Congress have begun
asking some tough questions about its usefulness, potential dangers, and
suspicions that some people may be using computers to manipulate the market.
60 Minutes Overtime: Robot Traders
In a secret new building in New Jersey, high-speed computers decide which
stocks to buy and sell. Could this kind of automated "trading floor"
lead to Wall Street's next "flash crash"?
Video Wall
Street: The Speed Traders
Steve
Kroft gets a rare look inside the secretive world of "high-frequency
trading," a controversial technique the SEC is scrutinizing in which
computers can make thousands of stock trades in less than a second
Video Extra:
Speed Traders Helping Small Investors?
High
frequency trader Manoj Narang says he's helping small investors, not hurting
them, because he's always in the market, keeping trading costs down and
providing what's called liquidity
Video Robot
Traders of the NYSE
In a secret
new building in new jersey ( meaningfully lawless, pervasively corrupt,
multi-ethnic mob-infested/controlled jersey, the perfect venue for this fraud ),
high-speed computers decide which stocks to buy and sell. Could this kind of
automated "trading floor" lead to Wall Street's next "flash
crash"?
Extra: How High Frequency Trading Grew
Extra: Computers Better Than Humans?
Extra: Speed Traders Helping Small Investors?
For 150 years, the floor of the New York Stock Exchange was
the center of the financial world, the economic engine that helped American
business raise capital and create jobs.
Today it is still the public façade of Wall Street, and a television backdrop
for reporters relaying financial news. But less than 30 percent of the trading
is conducted there now, and the specialists and the noise of the floor is being
replaced by the speed and quiet efficiency of computers, and the action has
moved elsewhere.
There are now more than 80 alternative trading systems around the country, plus
two brand new electronic stock exchanges which most of you have probably never
heard of: BATS and Direct Edge.
They're owned by the big banks and by high frequency trading firms, and neither
of them would give "60 Minutes" an interview or let us inside to film
their operations, but they trade more than a billion shares a day at blinding
speed, and most of those bets are being made by machines.
The players range from firms like Goldman Sachs, Barclays, Credit-Suisse and
Morgan Stanley to hedge funds and smaller operations like Tradeworx, which is
the only high frequency trading firm that would talk to us or let us in.
It's run by Manoj Narang and a small group of mathematicians and scientists
called "quants," which is short for quantitative analysts. Their high
speed computers trade 40 million shares every day.
Asked if humans are ever involved in the trading, Narang told correspondent
Steve Kroft, "Humans are not involved in the trading because humans are
way too slow to trade on the kinds of opportunities that we're trying to
capture. We're trying to capture opportunities that exist for only fractions of
a second."
The Tradeworx computers don't care where a stock is going to be trading next
year, next month, next week or even tomorrow, because they are going to be in
and out of it on the same day, in a matter of minutes.
"What's the point of buying and selling a stock that you hold for three
minutes?" Kroft asked.
"Same objective that all other participants have in the market, is to make
money. You buy low, sell high, that's how you make money," Narang said.
"And the computer will know when to buy and when to sell?" Kroft
asked.
"Sure, the computer is monitoring real-time data and it knows what to do
with that data and how to make decisions based on that," Narang replied.
What Narang and other high frequency traders tell their computers to do is to
make a profit of a penny or less, 40 million times day.
They scan the different exchanges, trying to anticipate which direction
individual stocks are likely to move in the next fraction of a second based on
current market conditions and statistical analysis of past performance. But the
computers have no real understanding of who these companies are and what they
do.
(CBS)
The computer doesn't know or care whether a company is
well managed. "It doesn't know who the CEO is or what that CEO's
background is. Doesn't know the management team," Narang said.
"Whether he's going through a divorce?" Kroft asked. "Whether
he's just been sued for sexual harassment?"
"Right. It knows information that you can quantify about the
company," Narang explained.
Asked if it's all math, Narang said, "It's all probability and statistics
- a procedure that you can define precisely."
The trading instructions are programmed into the computers with complicated
mathematical formulas called algorithms. Narang showed us how it works with a
simple, hypothetical example he uses for demonstration purposes.
"I'm gonna test a strategy where if a stock went down five percent for the
past week, I'm going to buy $5 of that stock. And if a different stock went up
ten percent last week, I'm going to sell $10 of that stock. And I'm gonna do
that for every stock that's in my tradable universe simultaneously," he
told Kroft.
"Which is how many?" Kroft asked.
"There's over 4,000 stocks, about 4,500 stocks," he replied.
The strategy, which could only be successfully executed with a high speed
computer, would result in almost as many losing trades as winners, but over the
past eight years would have produced a tidy profit - something that Narang and
other high frequency traders have gotten used to.
Asked how successful he and his firm have been, Narang told Kroft, "We've
had two or three days in a row where we lose money. But we've never had a week,
so far, where we lost. We've never had a month that was a loser for us."
Just four years ago, high frequency traders accounted for 30 percent of the
stock trades in the U.S. Today, estimates range as high as 70 percent. And
institutional traders, like Joe Saluzzi of Themis Trading LLC, have come to
believe that the game is rigged.
"How can you make money day after day? There was even one firm that said
they made money four years in a row every single day. Well you have to be
getting information that other people don't have, otherwise statistically
that's an impossibility," Saluzzi said.
Actually, high frequency traders are getting the same market information that
Saluzzi gets. They are just getting it a little bit sooner - it's only a few
fractions of a second sooner, but if you are running supercomputers, Saluzzi
says, it can be an eternity.
"What you're saying is the people with the fastest computers have an
advantage? They get the best deals?" Kroft asked.
"Every time. Absolutely. There's no doubt about it. I mean, if they're spending
that kind of money, and they're using that type of infrastructure, they're
doing it for a reason. And it is to get a speed advantage, in that
respect," Saluzzi replied.
It's not just the speed of the super computers that's important - it's also their
physical location. The closer they are to the stock exchange's server the
quicker they will be able to get critical market information.
Larry Leibowitz, the chief operating officer of the New York Stock Exchange,
believes its massive new data center in Mahwah, N.J. will help the exchange
regain some of the market share it has lost to electronic trading platforms.
And he is busy persuading traders to lease space in the center's stark black
boxes for their super computers.
(CBS)
It's called "co-location," a service that high
frequency traders will pay tens of thousands of dollars a month for, and
includes access to raw data from the exchange that is almost instantaneous.
"We're getting down to, you know, 'How fast can the electrons travel at
this point?'" Leibowitz explained.
"They can predict the price of a stock before you can, because of the
speed that they're using," Joe Saluzzi told Kroft.
"So, they actually see the trades before you do?" Kroft asked.
"They can see order flow coming into the exchanges before a regular person
off of say a Bloomberg or somebody who doesn't have the co-location, the data
feeds, and all the other sophisticated technology that they employ. Which is
not cheap, by the way, it's extremely expensive to set these things up,"
Saluzzi said.
Asked how much faster they see it, Saluzzi said, "It could be a few
milliseconds."
"How much of an advantage is a couple of milliseconds?" Kroft asked.
"Millions, if not billions of dollars a year," he replied.
That edge, Saluzzi claims, has made high frequency traders the new insiders on
Wall Street, and he says he spots signs of predatory behavior every day.
Saluzzi, who trades large blocks of stock for institutional investors, says the
supercomputers are programmed to place and then cancel thousands of orders a
second, trying to sniff out which way a market is moving in order to jump in
ahead of big rallies and sell off before big declines. He calls them parasites
who exploit a technological advantage to suck money out of the market and add
no value.
Asked if high frequency trading raises capital for companies, Saluzzi said,
"Absolutely not. If anything, it's distracting from the capital raising
process."
"Do these high-frequency trades have anything to do with market
fundamentals?" Kroft asked.
"Valuation is irrelevant. It's all about just moving the price up and down
the ladder all day long. Each day is new. Each day starts fresh. So, you have
to question the true valuation of the markets now," Saluzzi said.
Larry Leibowitz of the New York Stock Exchange says there is absolutely no
evidence that small investors are being hurt by high frequency trading. Most of
them, he says, don't care about pennies when they are buying and selling stocks.
And they're in it for the longer haul.
"Look, there's always been charges for as long as trading has existed that
people are front running orders, manipulating stocks. This is nothing new. I
think now you add to it the element of the mysterious element of 'the computer'
and it makes people even more mistrustful," he told Kroft.
Leibowitz and other proponents of high frequency, high speed computer trading
say it has performed a valuable function: tripling volume, reducing stock
spreads and transaction costs, and providing liquidity to the markets.
"Liquidity means that if you want to buy or sell a stock you could do it
right away, and you could do it at a fair price. That's what liquidity means.
And without short-term traders, there is no liquidity," Manoj Narang
explained.
Traders like Narang say their presence in the market is making it cheaper and
easier for everyone to buy and sell stocks, but regulators and lawmakers like
Senator Ted Kaufman of Delaware have other concerns.
"Clearly, liquidity's way up. But what I say is, liquidity's always
trumped by transparency and fairness. You can't have fairness if you don't have
transparency," Sen. Kaufman explained.
CBS) Kaufman,
who has both business and engineering degrees, says he is a big fan of
technology but he thinks it's gotten way ahead of financial regulators' ability
to monitor it. Right now, it's not even possible to determine for sure who is
making high frequency trades or what they are telling their computers to do.
"We don't know what's going inside those boxes. There's all types of
allegations about what's going on inside there. And basically what can happen
is you can have these meltdowns where you can have a computer just go crazy and
cause all kinds of problems," the senator said.
Which takes us back to the mini crash on May 6, and one of the scariest rides
in stock market history when the Dow Industrials at one point plunged 600
points for no apparent reason.
Turns out it was triggered when a mutual fund's computer dumped $4.1 billion of
securities on the market in a 20-minute period, which were then gobbled up by
the computers of high frequency traders and sold almost immediately, sending
other computers and traders heading for the exits.
"The events of May 6th scared people. I don't think there's any question
about that," SEC Chairman Mary Schapiro told Kroft.
Schapiro had already proposed rule changes before May 6 that would allow regulators
to track and tag high frequency trades and she is now considering further
measures.
"Are you comfortable with computers making 50 to 70 percent of the trades
on Wall Street?" Kroft asked.
"One of the concerns is, if one goes wrong, if it operates in an
unexpected way, given market conditions, what's the impact of that algorithm
that has behaved in an unexpected way, on lots of other investors in the
marketplace?" Schapiro replied.
And Schapiro says it has happened since the May 6 crash, after circuit breakers
were put in place that automatically halt trading in a stock that moves more
than 10 percent in a five minute period.
"A number of times that those circuit breakers have been triggered has
been because an algorithm operated in a way nobody intended for it to, causing
a stock price to go wildly out of range," Schapiro said.
The crash contributed to the crisis in confidence on Wall Street. Since last
spring, people have pulled $70 billion out of mutual funds and the biggest
concern of Schapiro and Senator Kaufman is that average investors have lost
faith in the integrity of the system.
"Is that correct?" Kroft asked the senator.
"Yes, that's true. Correct. And I'll give you an example. When I was at
Wharton, [a] professor came and he said, 'You know, there's a river of wealth
that runs through this country.' He said, 'A very small number of people know
that it exists. Some people can stand on a high hill and see it off in the
distance. Some people can get up on the edge. And there's other people are
swimming in it.' That's the perception American people have about what's going
on Wall Street right now. They believe there's a small number of people who are
swimming in this river of wealth," Kaufman replied.
"There are a lot of people out there who think that the stock market is
rigged. Rigged in the sense…that there are people out there who have
advantages, the insiders, the big companies?" Kroft asked Larry Leibowitz.
"Right. Yep. And I think that we have to do a better job of, first,
obviously making sure it's not the case," he replied. "But we can't
be evasive about it. We have to make changes that make sense, that give people
more confidence in the market, add more transparency, and make people feel
like, 'This is a place I can trust my retirement savings to.'" ‘
Produced by Tom Anderson