Citadel Investment Group LLC earned about $1 billion last year from a unit involved in high frequency trading, The Wall Street Journal reported, citing the testimony of a former employee of the hedge fund firm … the unit also posted returns of $892 million in 2007, up from $75 million in 2005, and about $3 million in 2004.
I have to admit, I’m impressed with the sheer simplicity of the mechanism:
HFT (high-frequency trading) enables certain very large traders (investment banks, hedge funds) to take advantage of a 40 nanosecond lag between the receipt and execution of automated orders to step in front of these orders, place their own buy and sell orders, and thereby make very small profits on the artificial inefficiency they create by this “interpositioning.”
The legendary arbitrageurs, who had to hold the stuff for literally minutes before cashing in, are so 20th-century.
Is this sort of thing legal? For now, yes:
[O]f course, the regulators will put a stop to it. By the time they actually get legislation passed, however, the game will have long since already ended.
The larger point: the regulators are finding that they are now almost always in a position of closing the barn door after the cow has wandered off. The traders already know this game is over, and have several more up their sleeve or already working, and regulators, of course, know nothing about them. By the time they do, players will have moved on to another game.
If it isn’t a metalaw, it should be: “There’s never been a crapshoot that actually lacked for crap.”