Extra, Extra: Wall Street Uses Technology to Make Money - InformationWeek

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7/24/2009
11:19 AM
Doug Henschen
Doug Henschen
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Extra, Extra: Wall Street Uses Technology to Make Money

The New York Times today unmasked what it calls "high frequency trading" in a page-one story that paints a picture of big Wall Street firms taking unfair advantage with the aid of technology. The story is really about complex event processing, or CEP technology, something that has been operating behind the scenes on Wall Street for years.

The New York Times today uncovered what it calls "high frequency trading" in a page-one story that paints a picture of big Wall Street firms taking unfair advantage with the aid of technology. The story is really about complex event processing, or CEP technology, something that has been operating behind the scenes on Wall Street for years. But now that TARP-money-taking financial firms are facing public scrutiny, suddenly the CEP "technological arms race" is being cast in a harsh light.

Here's a sampling of the article's take on high-frequency trading ills:

Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage. Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors...

Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits -- and then disappear before anyone even knows they were there...

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares.

These observations could have been made five years ago, but only now, a few days after Goldman Sachs reports huge profits, has the mainstream media woken up to the role of technology in trading. In gee-wiz terms, the article explains that high-frequency trading "helps explain why activity on the nation's stock exchanges has exploded."

Can it be true that CEP is "suddenly one of the most talked-about and mysterious forces in the markets?" Aleri, Progress Software, StreamBase and their competitors have been selling software up and down Wall Street for years, and before that, companies were developing home-grown versions of CEP.

My guess is that it was just a matter of timing -- and perhaps a bit of ignorance on the part of the mainstream news editors -- that landed this story on page one. Business/financial markets editors would know better than to cast this as new news.

The voice of reason in this article comes from Andrew Brooks, head of United States equity trading at T. Rowe Price, who observes that "you want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient... "

Does anyone really think we can stop businesses from exploiting technology for advantage? Seems to me that's the foundation of our industry.The New York Times today unmasked what it calls "high frequency trading" in a page-one story that paints a picture of big Wall Street firms taking unfair advantage with the aid of technology. The story is really about complex event processing, or CEP technology, something that has been operating behind the scenes on Wall Street for years.

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