A Perfectly Flawed Market - 06/03/10

High-frequency trading is botching up the markets and reducing investors' confidence.

"It was the biggest call of my career, and I kicked the [expletive] out of it. I just cost that kid a perfect game."

-- Major League Baseball umpire Jim Joyce

Last night, MLB umpire Jim Joyce blew a call with two outs in the ninth inning that cost Detroit Tigers pitcher Armando Galarraga a perfect game.

Here is the video of the botched call.

And during the day yesterday, the high-frequency trading strategies with algorithms geared toward following price momentum continued to disrupt the market by exacerbating the market's climb. (If you don't believe me, ask any head institutional trader at any major brokerage firm who sees and understands the order flow, or lack of traditional/plain vanilla trading flow.)

While few market participants will complain when high-frequency trading causes stocks to move abruptly higher (like in Wednesday's trading), it is, like Jim Joyce's call, botching up the markets and reducing investors' confidence (both of an institutional and individual kind).

As I have mentioned previously, with hedge funds de-risking and retail investors disaffected by both the investment shock of 2008 and the rising volatility of 2010, there is a trading void that is being exploited by momentum-based quant strategies. The associated illiquidity with fewer players "in the game" is leading to sharp moves to the upside and to the downside.

Don't expect MLB Commissioner Bud Selig to overrule Joyce's call, and don't expect the regulatory authorities (particularly the SEC) to respond swiftly either.

In all likelihood, with strong industry lobbying efforts and with the exchanges generally on their side, the high-frequency traders will continue to dictate daily market momentum until it is too late and the damage is done.

Just like Jim Joyce did last night.