Where’s the Equity in HFT?

In spite of all of the talk about equity, fairness and helping the middle class that’s been circulating in Washington, the stock market is now rigged to help the rich and powerful – and little is being done about it.

The individual investor is told to invest long-term and plan ahead. But the real money is being made in nanoseconds by supercomputers. If you have the right algorithm, you don’t need to plan for the next minute, never mind 30 years from now.

The SEC has been clamping down on insider trading, in which individuals use knowledge that isn’t available to the public for personal gain. But is high-frequency trading (HFT), in which computers mine data to find and take advantage of pricing inefficiencies, any different?

It’s legal for computers to make decisions based on information that isn’t available to the public, but it’s not legal for people to do so.

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The End of QE?

The Fed’s quantitative easing program has been like that endless tub of popcorn or vat of soda that those with large appetites buy at the theater.  It goes on and on, but at some point, enough is enough.  Are you really ever going to refill that?

The Federal Reserve Board has gorged on bonds for years now and some board members are finally losing their appetite for continuing, according to minutes from the last meeting of the Federal Open Market Committee.

The supersized QE3, the third round of quantitative easing, was supposed to continue until the unemployment rate dropped to a reasonable number.  The only problem is that buying bonds doesn’t produce jobs.

Even accounting for Storm Sandy’s impact, job growth remains stalled, with the unemployment rate stuck at 7.8%.  While the rate is significantly lower than it was in 2009 (9.9%), it is nowhere near the 5.0% rate of 2007.  More troubling, much of the rate drop is due to people either dropping out of the workforce or taking low-paying part-time jobs.

That doesn’t mean that quantitative easing is without consequences.  The sudden nervousness of some Fed members reflects the fear that buying $85 billion in Treasuries and agency paper will destroy the dollar.

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Fiscal Cliff Turns Into Fiscal Bluff

“What’s a five letter word for ‘cliff’?“ an editorial page cartoon asked.  The answer: “Bluff.”

To bluff is to mislead and that’s an appropriate summary of the fiscal cliff agreement, which will raise taxes and spending, while failing to consider the country’s growing debt crisis.

The market reacted positively, with the Dow Jones Industrial Average initially up more than 2% and markets in other parts of the world showing similar gains.

The market reaction was not, we suspect, because a well-crafted agreement that benefits America had been negotiated, but because the “fiscal cliff” had been avoided at the last possible second.  Consider what the agreement does – and what it doesn’t do.

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