Thursday, January 27, 2011

Evaluation of a Trading Room-Beware

From time to time many of my trading friends, followers and subscribers ask me to evaluate the TRUE unbiased VALUE of Live Trading Room “ Educators “ that they have attended as guests.

Since 1993 I have attended and invested in many thousands of Trading Seminars and Live Trading Training of the Futures and Financial Markets giving me a very unique and qualified perspective of many different trading methods and trading teaching techniques used in the Online of Offline Trading Industry.

Here is for the entire world to see, the Unbiased and Qualified Evaluation of
“The Trading Zone”

High-frequency Trading gets away with Fraud and market Manipulation:

High-frequency trading is undeniably the wave of the future, but computerized strategies continue to receive the stink and skeptical eye from regulators and the public.

The specter of high-speed mistakes is haunting the markets, and AXA Rosenberg Group and Barr Rosenberg Research Center have agreed to pay over $200 million in a Securities and Exchange Commission settlement involving an algorithmic error.

Orinda, Calif.-based AXA has over $30 billion under management.

A problem with a Barr Rosenberg's algorithm was discovered in 2009, the SEC says, but AXA decided not to disclose related performance problems for investors:

In late June 2009, a stupid BRRC employee discovered an error in the Model’s computer code that was introduced in 2007 and effectively eliminated one of the key components in the Model for managing risk. This employee later discussed his finding in a meeting with senior ARG and BRRC officials and employees. A senior ARG and BRRC official (“Senior Official”) directed them to keep quiet about the error and to not inform others about it, and he directed that the error not be fixed at that time.

AXA came clean with clients in April of last year.

While SEC settlements over investment performance are not always able to calculate the exact damages to investors, in this case a hard number has been calculated. A consultant “determined that the error resulted in approximately $216,806,864 in losses across 608 client portfolios.”

AXA agreed to pay this amount to make clients whole, along with a civil penalty of $25 million. It also agreed to heighten its compliance efforts.

The complex algorithm was misused so that one of its variables fell out of the equation, leading to performance anomalies AXA blamed on other factors, like market volatility.

In Canada, The Globe and Mail recently examined trends in payment for order flow and noted that individual investors are often the ones paying the bill in make and take markets. The piece sparked feedback that was polarized – readers were either for or against HFT, with few fence riders.

The thread running through both sides of the argument is that one way or another, there are costs for having somebody willing and able to buy your shares if you want to sell immediately. In today’s market, that cost is paid through a fee that is mostly passed on to the HFT firms that have become modern day market makers. Prior to the entry of the HFTs, the cost was built into the bid-ask spread set up by market making brokers.

In the U.S., the SEC is looking at new ways to regulate HFT and algorithmic trading. Barron’s says that on Friday, commission Chairman Mary Schapiro made these remarks at a conference:

" Given the potential for trading algorithms to cause severe trading disruptions and shake investor confidence, we are considering whether they should be subject to appropriate rules and controls. We are examining trading or other obligations that might be required of today’s de facto market makers: the high-frequency traders which account for over 50 percent of daily trading volume and supply much of the market’s liquidity."

Likewise, the Commodity Futures Trading Commission is considering measures to review trading algorithms. But if the highly compensated egg-heads and greedy porfolio managers that create these things make mistakes buried in millions of lines of code, can we really expect workaday bureaucrats to ferret out the problems and eliminate the fraudulent manipulation?






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