You probably don’t even realize it. But with every investment you make, you’re being scammed.
It’s sad, scary and true…
Every time you put more money into your 401k…buy a stock…or invest in a mutual fund or ETF…you’re paying a hidden extra fee.
But you won’t find this fee disclosed by your broker or financial advisor. In fact, they’re probably completely oblivious to the scam.
This hidden fee is the added cost of trading. That’s because every time you make an investment, a high frequency trader gets involved. And they make sure that you pay a little extra for every share.
On any single transaction, the cost is small. But every year, high-frequency trading costs investors $20 billion. And that’s money that should belong to investors like you and me.
So how do these traders rip off investors? What are the trading strategies employed by these firms?
It’s actually rather simple. Most high-frequency trading activity fits within one of three strategies. And a better understanding of these trading strategies will make help you be more informed and better prepared to protect your investment portfolio from high-frequency trading scams.
Predatory Trading Strategy #1: Market-Making
Market-makers facilitate the trading of stocks. They are broker-dealers that hold shares of stock in inventory. This allows them to provide liquidity to the market, and fulfill both buy and sell orders very quickly.
In exchange for taking the risk of holding shares of the stocks for which they make the market, high-frequency trading firms try to earn a profit on the “spread” when a trade is completed. This is the difference between the “bid” price and the “ask” price.
Given their superior speed, these market-makers frequently change their quotes to reflect incoming orders and cancellations. This means high-frequency trading firms enter and cancel a lot of orders for each transaction. This process helps them make profitable spreads for those transactions that they do complete. The bottom line is that high-frequency traders who act as market-makers have so much information regarding demand for a stock that they have a distinct trading advantage.
Predatory Trading Strategy #2: Index Arbitrage
Arbitrage is the practice of simultaneously selling and buying an asset in different markets in order to profit from a short-term difference in price. Let’s consider the example of the best known stock market index – the S&P 500.
S&P 500 futures are traded on the Chicago Mercantile Exchange. And the SPDR S&P 500 (NYSE: SPY) is the ETF that tracks the S&P 500. It’s traded on virtually every major exchange in the U.S., as well as several abroad. S&P 500 futures and the SPY are essentially the same thing. Yet any difference in price can represent a profit opportunity.
To profit from an index arbitrage trade, a high-frequency trader could quickly buy or sell the SPY while taking the opposite directional trade on S&P 500 futures. Doing so allows them to make a small profit on the difference.
Of course, this all happens extremely quickly and requires computers that have the fastest links to the Chicago Mercantile Exchange and another stock market like the NYSE.
With index arbitrage, the spoils go to the trader the fastest connection to the markets. Because once the trade begins, the gap between the two investments narrows. Don’t bother trying to beat the high-frequency trading firms at this game.
Predatory Trading Strategy #3: Directional Trading
Directional trading strategies are based on a simple premise – a trader places a trade because he believes that a stock is going to go either up or down, and the trade he places reflects that belief. But when high-frequency traders get involved in directional trading, things get more complicated.
Main Street investors often make investments based on information contained in press releases. What if you had a computer that parsed press releases for you, and made directional trades based on their content?
That’s what high-frequency traders do. So when that press release comes out stating that your stock grew revenues 50% faster than analysts expected, know that a trader has already begun to exploit the opportunity.
Want To Learn More About HFT Strategies?
High-frequency traders use a variety of tactics to rake in huge profits. In the recently released bestseller, author Michael Lewis pegs this Wall Street scam at $20 billion per year.
That’s $20 billion that’s being taken out of the pockets of mutual funds, hedge funds, and individual investors like you and me.
It’s crucial that every investor understand the latest tactics being used by Wall Street traders to scam individual investors. That’s why I’ve made special arrangements to send you a hardcover copy of Flash Boys: A Wall Street Revolt.
I’ve secured just 500 copies of Flash Boys through a special deal with the book publisher. And I want to send you a free copy of the book today (retail price $27.95).
To claim your copy today, just click here now. Supplies are limited…I encourage you to respond immediately to secure your copy.