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HFT and big dollars

There’s more evidence today about the big profitability of computer-driven high-frequency trading.

The Wall Street Journal says Ken Griffin’s Citadel Investment Group hedge fund empire made $1 billion from proprietary trading with HFT last year. The profitability number came out during testimony in an ongoing lawsuit Citadel has filed against a group of former HFT employees who left to start their own firm.

This is the same upstart firm that alleged Goldman Sachs HFT computer code thief Sergey Aleynikov had gone to work for before being nabbed July 4 weekend at Newark Liberty Airport. Aleynikov, who has pleaded not guilty and is trying to work out a plea deal, is set to be in court again on Oct. 16.

What’s worth remembering is this $1 billion figure is just the money raked in by Citadel’s prop trading HFT business. It doesn’t include the dollars Griffin’s empire takes in from market making–a business that’s also driving by HFT computer programs.

Calling all HFT victims

Now that the SEC has rebuffed my request to gather information about investor complaints about high-frequency trading, I’m calling on you for help.

If you have sent a complaint in the past year complaining about HFT and the impact it is having on particular stocks, or the broader market, I’d like to hear from you. You can reach me by email: matthew.goldstein@thomsonreuters.com

SEC’s flash in the pan

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Securities regulators will often settle for the proverbial low-hanging fruit — prosecuting easy cases that don’t make a big difference in the way Wall Street operates. But it does give the appearance they’re doing something.

And so it is with the Securities and Exchange Commission’s proposal to stamp out flash trading, an unsavory practice that has permitted some high-frequency trading desks to get a millisecond sneak peak at market trade orders.

The flatness of being a high-frequency trader

A common claim made by the high-frequency trading crowd is that their funds end the day flat–with little overnight exposure to a given stock.

In other words, high-frequency traders argue they always manage to find some other sucker–I mean trader–to layoff their positions on before shutting down their algorithims for the night.

Keeping Citadel’s E*Trade Gambit a Secret

Who really knows what Ken Griffin has up his sleeve for E*Trade Financial.

Last month, Griffin indicated that his Citadel Investment Group hedge fund gradually would sell-off about 10% of of its E*Trade stock. Then yesterday, Griffin and Citadel said, “never mind.”

Citadel offered no explanation for its sudden change of heart beyond pointing to the press release it issued on the matter.

The Getco get

The owners of Getco, the Chicago-based high-frequency trading firm, long have been tight lipped–preferring to say little despite the firm’s outsized role in computer-driven, lightening fast trading. So I was looking forward to reading today’s Getco profile in The Wall Street Journal. But after reading the story, I came away disappointed.

Sure, as a general profile of Getco and its founders, the story is fine. And the article gives a good illustration of how high-frequency trading works. But the story fell short on so many levels.

The liquidity canard

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It’s often said on Wall Street that the more liquidity there is in a given market, the better things are for investors trading stocks, bonds or commodities. And while there’s a lot of truth to that, there are times when too much liquidity can be just the wrong tonic.

After all, Wall Street’s churning-out of one subprime-mortgage backed security after another pumped a lot of liquidity into the U.S. housing market, and that simply encouraged a lot of reckless — even fraudulent — lending.

The right response to HFT

Kudos to Sen. Edward Kaufman for asking securities regulators to take a comprehensive look at the impact of high-frequency trading and related super-fast trading strategies on the markets.

The Delaware senator is taking the right approach in asking the Securities and Exchange Commission to conduct a broad review of HFT, so-called flash orders and dark pools. It’s a much better approach than the more narrow one taken by Sen. Chuck Schumer, who last month focused solely on the impact of flash orders on the market.

Regulators ram Citadel’s gate

The Office of Thrift Supervision isn’t known as the world’s most aggressive regulators. In fact, the Obama administration wants to merge it out of existence.

So I was quite surprised when the OTS late Friday decided to suspend consideration of an application that would have enabled Citadel Investment Group to get control over virtually all of E*Trade Financial customer trades–what’s known as order flow on Wall Street.

Citadel’s E*Trade Bonanza

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Citadel Investment Group’s move to aggressively sell off its substantial stake in E*Trade Financial looks like hedge fund magnate Ken Griffin is throwing in the towel on his big gamble on the online broker.

But Citadel isn’t bailing on E*Trade. In fact, if Griffin gets his way, the Chicago hedge fund will have its fingers dug deeper into E*Trade, getting daily access to virtually all of the online broker’s stock and option trades.

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