1NVEST0R MAND1R1 maen SAHAM bener

belajar MANDIRI, akan JAUH LEBE SUKSES (SEJAK 210809)

tokyo niru wall street, kapan JSEX neh … 050110 5 Januari 2010

Filed under: Transaksi Super Cepat — bumi2009fans @ 11:19 pm

[ Selasa, 05 Januari 2010 ]
Berlakukan Sistem Baru, Trading di TSE Butuh Waktu Sangat Singkat
TOKYO – Bursa saham terbesar di Asia, Tokyo Stock Exchange (TSE), memberlakukan sistem trading baru mulai kemarin (4/1). Sistem itu akan memungkinkan proses trading butuh waktu sangat singkat, hanya lima milidetik.

Rekor trading tercepat tersebut 600 kali lebih cepat dari 2-3 detik yang dibutuhkan pada sistem umumnya, seperti di Bursa Efek Indonesia (BEI). Kecepatan ini setara dengan bursa saham New York dan London. “Kami saat ini tengah melakukan pemeriksaan terakhir untuk sistem yang disebut Arrowhead itu,” ujar seorang jubir TSE seperti dilansir Reuters kemarin.

Arrowhead akan mempermudah sistem trading berfrekuensi tinggi melalui komputer. Sistem ini menggunakan alogaritma untuk memperdagangkan saham dalam hitungan milidetik. Sehingga memperoleh keuntungan dari penyebaran yang kecil dan menghindari ketidakseimbangan pasar.

Bulan lalu, TSE terpaksa membayar kerugian hingga USD 120,5 juta kepada Mizuho Securities karena kesalahan sistem trading yang terjadi pada 2005. TSE juga pernah memotong jam trading pada 2006 karena skandal akunting Liverdoor Co yang memicu jual besar-besaran saham perusahaan internet itu. Pasalnya, TSE tak mampu menahan panic selling para investor. (rtr/ap/kim)

 

fbi di rahasia perusahaan wall street 12 September 2009

Filed under: Transaksi Super Cepat — bumi2009fans @ 11:02 pm

August 24, 2009
Arrest Over Software Illuminates Wall St. Secret

By ALEX BERENSON
Flying home to New Jersey from Chicago after the first two days at his new job, Sergey Aleynikov was prepared for the usual inconveniences: a bumpy ride, a late arrival.

He was not expecting Special Agent Michael G. McSwain of the F.B.I.

At 9:20 p.m. on July 3, Mr. McSwain arrested Mr. Aleynikov, 39, at Newark Liberty Airport, accusing him of stealing software code from Goldman Sachs, his old employer. At a bail hearing three days later, a federal prosecutor asked that Mr. Aleynikov be held without bond because the code could be used to “unfairly manipulate” stock prices.

This case is still in its earliest stages, and some lawyers question whether Mr. Aleynikov should be prosecuted criminally, or whether a civil suit may be more appropriate. But the charges, along with civil cases in Chicago and New York involving other Wall Street firms, offer a glimpse into the turbulent world of ultrafast computerized stock trading.

Little understood outside the securities industry, the business has suddenly become one of the most competitive and controversial on Wall Street. At its heart are computer programs that take years to develop and are treated as closely guarded secrets.

Mr. Aleynikov, who is free on $750,000 bond, is suspected of having taken pieces of Goldman software that enables the buying and selling of shares in milliseconds. Banks and hedge funds use such programs to profit from tiny price discrepancies among markets and in some instances leap in front of bigger orders.

Defenders of the programs say they make trading more efficient. Critics say they are little more than a tax on long-term investors and can even worsen market swings.

But no one disputes that high-frequency trading is highly profitable. The Tabb Group, a financial markets research firm, estimates that the programs will make $8 billion this year for Wall Street firms. Bernard S. Donefer, a distinguished lecturer at Baruch College and the former head of markets systems at Fidelity Investments, says profits are even higher.

“It is certainly growing,” said Larry Tabb, founder of the Tabb Group. “There’s more talent around, and the technology is getting cheaper.”

The profits have led to a gold rush, with hedge funds and investment banks dangling million-dollar salaries at software engineers. In one lawsuit, the Citadel Investment Group, a $12 billion hedge fund, revealed that it had paid tens of millions to two top programmers in the last seven years.

“A geek who writes code — those guys are now the valuable guys,” Mr. Donefer said.

The spate of lawsuits reflects the highly competitive nature of ultrafast trading, which is evolving quickly, largely because of broader changes in stock trading, securities industry experts say.

Until the late 1990s, big investors bought and sold large blocks of shares through securities firms like Morgan Stanley. But in the last decade, the profits from making big trades have vanished, so investment banks have become reluctant to take such risks.

Today, big investors divide large orders into smaller trades and parcel them to many exchanges, where traders compete to make a penny or two a share on each order. Ultrafast trading is an outgrowth of that strategy.

As Mr. Aleynikov and other programmers have discovered, investment banks do not take kindly to their leaving, especially if the banks believe that the programmers are taking code — the engine that drives trading — on their way out.

Mr. Aleynikov immigrated to the United States from Russia in 1991. In 1998, he joined IDT, a telecommunications company, where he wrote software to route calls and data more efficiently. In 2007, Goldman hired him as a vice president, paying him $400,000 a year, according to the federal complaint against him.

He lived in the central New Jersey suburbs with his wife and three young daughters. This year, the family moved to a $1.14 million mansion in North Caldwell, best known as Tony Soprano’s hometown.

A video on YouTube portrays Mr. Aleynikov as a disheveled workaholic who suffers through romantic misadventures before finding love when he rubs a lamp and a genie fulfills his wish by granting him a wife. A friend, Vladimir Itkin, says the Aleynikovs are devoted to their children and seem very close.

This spring, Mr. Aleynikov quit Goldman to join Teza Technologies, a new trading firm, tripling his salary to about $1.2 million, according to the complaint. He left Goldman on June 5. In the days before he left, he transferred code to a server in Germany that offers free data hosting.

At Mr. Aleynikov’s bail hearing, Joseph Facciponti, the assistant United States attorney prosecuting the case, said that Goldman discovered the transfer in late June. On July 1, the company told the government about the suspected theft. Two days later, agents arrested Mr. Aleynikov at Newark.

After his arrest, Mr. Aleynikov was taken for interrogation to F.B.I. offices in Manhattan. Mr. Aleynikov waived his rights against self-incrimination, and agreed to allow agents to search his house.

He said that he had inadvertently downloaded a portion of Goldman’s proprietary code while trying to take files of open source software — programs that are not proprietary and can be used freely by anyone. He said he had not used the Goldman code at his new job or distributed it to anyone else, and the criminal complaint offers no evidence that he has.

Why he downloaded the open source software from Goldman, rather than getting it elsewhere, and how he could at the same time have inadvertently downloaded some of the firm’s most confidential software, is not yet clear.

At Mr. Aleynikov’s bail hearing, Mr. Facciponti said that simply by sending the code to the German server, he had badly damaged Goldman.

“The bank itself stands to lose its entire investment in creating this software to begin with, which is millions upon millions of dollars,” Mr. Facciponti said.

Sabrina Shroff, a public defender who represents Mr. Aleynikov, responded that he had transferred less than 32 megabytes of Goldman proprietary code, a small fraction of the overall program, which is at least 1,224 megabytes. Kevin N. Fox, the magistrate judge, ordered Mr. Aleynikov released on bond.

The United States attorney’s office declined to comment and the F.B.I. did not return calls for comment.

Harvey A. Silverglate, a criminal defense lawyer in Boston not involved in the case, said he was troubled that the F.B.I. had arrested Mr. Aleynikov so quickly, without evidence that he had made any effort to use or sell the code. Such disputes are generally resolved civilly rather than criminally, Mr. Silverglate said.

“It is astonishing that the F.B.I. arrested this defendant at all,” he said. Other firms have also sued former employees recently over concern about high-frequency trading software, though two similar cases are the subject of civil suits rather than criminal prosecution.

Six days after Mr. Aleynikov’s arrest, Citadel, the hedge fund, sued Mr. Aleynikov’s new employer, Teza Technologies, which was founded in March by three former Citadel employees. While Teza is not yet conducting any trading, Citadel claimed the former employees had violated a noncompete agreement with Citadel and might even be trying to steal Citadel’s code, causing “irreparable harm.”

As part of the suit, Citadel detailed the extraordinary steps it takes to protect its software. Besides encrypting its programs, the firm discourages employees from writing down details about them. Its offices have cameras and guards, and there are secure rooms that require special codes to enter. The precautions are necessary because Citadel has spent hundreds of millions of dollars developing its software, the firm said.

In its response, Teza said that it had never stolen or tried to steal Citadel’s software, did not ask Mr. Aleynikov to take code from Goldman, and had never seen the code he took. A lawyer for Teza did not return calls for comment.

Meanwhile, in March, the giant Swiss bank UBS sued three former members of its high-speed trading group in New York state court. UBS contended that the defendants had lied to the bank about their plans to work for Jefferies, another firm. Also, one defendant sent some UBS code to a personal e-mail account.

Lance Gotko, a lawyer for the men, said that they had not used the code they took and that it might not be valuable to Jefferies in any case. A lawyer for UBS referred calls to a bank spokeswoman, who declined to comment. A spokesman for Jefferies declined to comment.

 

pedagang FREKUENSI TINGGI lage ngetren di wall STREET

Filed under: Transaksi Super Cepat — bumi2009fans @ 9:55 pm

… kalo gw perhatiin sekilas, jelas taktik sehari-hari gw di transaksi maen saham gw mirip dengan prinsip maen FREKUENSI TINGGI yang dibahas berikut ini … baca sinyal, jual beli kecil-kecilan dan mengandalkan selisih jual-beli yang berlaba kecil2 tapi sering … wow, gw ga ngeh dah selama ini gw ikut-ikutan pola maen di wall street yang lage ngetren … tapi otak gw mah uda pasti ga bisa dibandingkan dengan superkomputer bo … jauuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuh … 😛
baca ini dari wall street journal :
AUGUST 1, 2009
What’s Behind High-Frequency Trading
By SCOTT PATTERSON and GEOFFREY ROGOW

High-frequency trading, long an obscure corner of the market, has leapt into the spotlight this year. Wildly successful in 2008, high-frequency traders are the talk of Wall Street, attracting big bucks and some unwanted attention. Concerns that some traders are taking advantage of less fleet-footed investors has drawn the attention of regulators and members of Congress. The following is an explanation of the core issues, based on interviews with industry participants and regulators.

Q: What is high-frequency trading?

A: Definitions differ, but at its most basic, high-frequency trading implies speed: Using supercomputers, firms make trades in a matter of microseconds, or one-millionth of a second. Goals vary. Some trading firms try to catch fleeting moves in everything from stocks to currencies to commodities. They hunt for “signals,” such as the movement of interest rates, that indicate which way parts of the market may move in short periods. Some try to find ways to take advantage of subtle quirks in the infrastructure of trading.

Other firms are “market makers,” providing securities on each side of a buy and sell order. Some firms trade on signals and make markets.

Q: How do players make money in high-frequency trades?

A: Many high-frequency traders collect tiny gains, often measured in pennies, on short-term market gyrations. They hunt for temporary “inefficiencies” in the market and trade in ways that can make them money before the brief distortions go away.

Market-making, high-frequency firms hope to make money on the difference between how much investors are willing to buy and sell a stock, or the “bid-ask spread.” They do this by selling and buying on both sides of the trade. Many exchanges offer “rebates” of about one-third of a penny a share to outfits that are willing to step up and provide shares when needed.

Q: Who are the big players in high frequency?

A: They range from well- to lesser-known firms. Goldman Sachs Group Inc. and Chicago hedge fund Citadel Investment Group LLC have high-frequency operations. An innovator in superfast trading strategies is hedge-fund firm Renaissance Technologies LLC.

Privately held Getco LLC, a Chicago high-frequency firm founded in 1999, is a registered market maker with operations in markets around the world. Other high-frequency outfits include firms such as Jane Street Capital LLC, Hudson River Trading LLC, Wolverine Trading LLC and Jump Trading LLC.

Q: Why is everyone talking about high-frequency trading?

A: In the trading community, high-frequency has drawn interest because it was a wildly successful strategy last year. More recently, it made headlines when a former Goldman Sachs employee was charged by federal prosecutors with stealing trade secrets from the firm’s high-frequency platform.

Also grabbing attention are the volume numbers. High-frequency trading now accounts for more than half of all stock-trading volume in the U.S. It also generates more revenue for exchanges. NYSE Euronext, owner of the New York Stock Exchange, is building a data center to cater to high-speed traders.

Q: What are “flash orders,” and what is the controversy surrounding them?

A: Typically on trades, exchanges pay rebates to traders who post shares to buy or sell and charge fees to traders who respond to those offers. This setup creates an incentive to earn rebates. That is one place where flash orders come in.

With a flash order, a trading firm can keep its order on a certain exchange for up to half a second without matching an existing buy or sell order on another exchange, a move that puts it in a position of poster, rather than responder. The hope is that another trader who needs to buy or sell quickly steps in on the other side of the trade. This dynamic boosts the chance the flash-order trader will complete the trade on the exchange and get the rebate. Exchanges offer flash orders to keep market share.

Regulators worry that certain unscrupulous participants in the market with ultrafast computer technology could game these orders, trading ahead of them and affecting the price of the security.

Q: Who will be hurt if flash orders are banned?

A: A ban on flash orders, under consideration by the Securities and Exchange Commission, could hurt the profits of high-frequency traders who use flash extensively. Some flash-order advocates said a ban could cause trading volume to drop on the exchanges as traders look for better execution in alternative, less-transparent venues.

Q: What is “naked access,” and why the controversy around it?

A: Many brokers allow high-frequency outfits to trade directly on an exchange using a broker’s computer-access code. Most brokers closely monitor the activity, but some allow the traders to interact with the exchange largely unchecked, according to regulators such as the SEC. In the industry, this is known as “naked access.” Critics worry that a rogue firm’s system could destabilize parts of the market, even leading to a broad-based market selloff, without proper oversight and risk controls.

Q: How does it impact mom-and-pop investors?

A: Proponents said high-frequency provides a constant, ever-ready flow of securities when investors need them, making trading cheaper for everyone. When a mutual fund wants to buy 10,000 shares of Google Inc., odds are a high-frequency shop will be ready to provide the shares.

Critics worry that traders could use quick-draw capabilities to drive up prices, selling them back to investors at an inflated level. Another concern are rebates that exchanges pay to high-frequency traders, as the costs could be passed on to investors.

Q: Am I a high-frequency trader without realizing it?

A: Most online brokers that cater to individual investors and nearly all full-service brokers have servers at the stock-trading platforms to cut buying and selling speed down to milliseconds. This ensures orders are disposed of quickly and efficiently at high speeds. However, brokers generally don’t use the highly sophisticated strategies plied by dedicated high-frequency traders, such as trading off of obscure signals in the market.

[High-Frequency Trading]
July 24, 2009
Stock Traders Find Speed Pays, in Milliseconds
nyt
By CHARLES DUHIGG
It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. 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. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.

But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. 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 — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”

The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, and ended up handing spoils to lightning-fast computers.

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates.

“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.”

The Thirty-Millisecond Advantage

 

kisah orang2 yang BERHASIL mengakali bursa… 10 September 2009

Filed under: Transaksi Super Cepat — bumi2009fans @ 9:37 pm

How To Become A Wall Street Wizard At Home
Emily Lambert, 09.09.09, 1:00 PM ET
Dallas, Pa., is a long way from Wall Street. It’s a borough of 2,500 people in the hills outside of Scranton. But from his basement home office there, John Joseph is engaged in the kind of super-fast trading that is changing the world’s securities markets. Joseph, 36, considers himself closer to a sophisticated retail trader than he is to the big institutions that dominate the business. Yet in trading he’s holding his own.

“We are beating on a regular basis everyone else in the world on the trade we’re trying to get,” he claims.

High-frequency trading is a lightning-fast, high-volume endeavor that has emerged in the past few years as the hottest thing
on Wall Street. It’s dominated by proprietary trading groups, big banks and hedge funds like Getco, Goldman Sachs, Barclays and Citadel. But it’s possible, although risky, for individuals to dip a toe into this world, as Joseph has.

Individuals with a hankering to give it a try should be forewarned: They will be going head-to-head with some of the sharpest minds, and deepest pockets, on Wall Street. Most are likely to lose. That’s because the hyper-competitive business involves writing complex algorithms and using staggering amounts of computing power to capitalize on tiny inefficiencies in equity, futures and options markets.

What makes Joseph think he’s got a fighting chance is the fact that he’s a math whiz with the skills needed to carve out a niche. Joseph was in his fifth year working on a doctorate in mathematics at the University of Massachusetts when he had the somewhat belated realization that he wasn’t cut out for academics. So in 2000, he left school to research technology companies and was hired by a boutique brokerage firm that went bust three weeks after he started. That brief tenure in the securities business was enough to hook Joseph on the notion that automation could improve trading.

Joseph spent the next three years in marketing and spent his free time learning how to build automated trading programs. When he was convinced his programs worked, and that he’d need more time and money to make them really successful, he left his job and used his algorithms to trade futures from home. He now oversees accounts for himself, friends and outside clients worth $10 million that are devoted to the algorithmic trading model he developed.

Joseph’s algorithms essentially turned him into an automated day trader. Initially, he held positions for between two minutes and 2.5 hours. In contrast, the sort of high-frequency trading now taking Wall Street by storm involves buying and selling securities dozens, hundreds or even thousands of times a second. Last year Joseph got into that game too.

He was introduced to it by two former floor traders who’d become interested in electronic trading. Joseph translated their concepts into algorithms, which another partner then coded. They formed a small proprietary trading shop called Rooftop Trading. Joseph’s new algorithms are trading 2,000 times faster than his older ones. He declines to disclose the value of the assets he and his partners have devoted to their high-frequency trades.

With billions of dollars at stake, high-frequency traders are engaged in a high-tech arms race in a bid to beat each other and investors to the most lucrative trades. The rivalry is a game of “co-locating,” which involves hosting computers in data centers where exchanges keep their own computers. Big firms can spend $200,000 a month for such prime real estate. Through his broker, Joseph uses a service called Zen-Fire to lease a server in such a data center. The cost is bundled into his brokerage commissions, which vary depending on how much his firm trades.

Zen-Fire’s founder, Patrick Shaughnessy, says a growing number of retail traders are writing their own algorithms. After signing a confidentiality release, he will tell them if he thinks their work has a fighting chance in the market. He sells the few that seem promising super-fast connections to futures and foreign exchange markets. He plans to offer rapid-fire stock trading next year.

Back in his Dallas, Pa., office, Joseph uses three computers, including standard desktop models and a laptop, to remotely tap into Zen-Fire’s computer at the data center and tweak his high-frequency algorithm. He uses both cable and DSL lines for redundancy, knowing that a strong storm could knock out his Internet connection. If it does, his algorithms will continue to run at the data center without his oversight.

Like big firms that jealously guard their secrets, Joseph won’t talk about his strategy except to say he finds inefficiencies in the market that bigger firms with more capital are unlikely to care about.

Joseph says he’s making money but warns it’s been harder to find opportunities this year because long-term traders and investors are hanging onto their positions.

“I tell my wife every dollar we make could very easily be the last,” he says.

The New Masters of Wall Street
Liz Moyer and Emily Lambert 09.21.09, 12:00 AM ET

Daniel Tierney and Stephen Schuler share a lot of traits with many other enigmatic traders populating the financial world. Their firm, Global Electronic Trading Co., is tucked behind a nondescript door on the second floor of the Chicago Board of Trade’s art deco building. Until this summer, when it added some company specifics, its Web site contained little more than a reading list with recommendations like Reminiscences of a Stock Operator. Not a single photo is publicly available of either of its principals.

What distinguishes Tierney and Schuler is that Getco, as their firm is known, currently buys and sells 15% of all the stocks traded in the U.S., ranking it among the likes of Goldman Sachs and Fidelity Investments. Getco was reportedly valued at $1 billion two years ago and is rumored to have earned roughly half as much as that in net profit last year alone. Tierney, 39, and Schuler, 47, are among Wall Street’s super-nouveau-riche.

“We translate technology innovation into making financial markets more efficient,” Tierney says in a carefully worded interview.

Getco earns its outsize profits buying and selling securities up to thousands of times a second. This frenetic profession has come to be known as high-frequency trading, and in recent months it has emerged as the hottest ticket on Wall Street. Even as financial markets collapsed last year, high-frequency traders collectively enjoyed $21 billion in gross profit, according to Tabb Group. On the NYSE, daily volume surged 43% through June from a year earlier to 6.2 billion shares; high-frequency traders are believed to account for 50% to 70% of the activity and similar proportions in electronic futures and options markets.

In the process they have ushered in the most wrenching, and controversial, transition in the history of U.S. securities markets. For decades the New York Stock Exchange towered over U.S. equity trading, with its market share rarely dipping below 80%. Nasdaq and other electronic rivals slowly chipped away at it. But the real shakeup has come very recently at the hands of high-frequency traders and the band of scrappy exchanges that have popped up in their orbit. In the past two years they have collectively cut, from 50% to 28%, the share of equity volume controlled by the NYSE, even as it has sacrificed its iconic floor to the whims of the electronic crowd.

With their emergence as the predominant source of activity and profits, high-frequency traders have become the new masters of the Wall Street universe, reshaping financial markets in their image, just like the junk bond kingpins, corporate raiders and private equity powerhouses who reigned before them. High-frequency traders and their offshoots–the public trading venues that cater to them and the private “dark pools” that seek to shut them out–have become lightning rods for criticism among frazzled individual investors and grandstanding politicians who are shocked–shocked!–to find Wall Street trying to make a buck at a time like this.

Senator Charles Schumer (D–N.Y.) has demanded that the Securities & Exchange Commission prohibit the high-frequency gang from using something called flash quotes. SEC Chairman Mary Schapiro warned the lack of transparency in dark pools has “the potential to undermine public confidence in the equity markets.” Nasdaq’s Robert Greifeld has called for banning them outright. “America is destroying its capital market structure,” frets Thomas Caldwell, chairman of Caldwell Asset Management, an NYSE investor.

Here’s another viewpoint: All these scolds are missing the bigger picture. High-frequency trading adds liquidity, speeds execution and narrows spreads. This contrary view comes from, among others, George (Gus) Sauter, who oversees $920 billion in investments for the Vanguard Group. “We do think [high-frequency trading] enhances the marketplace for all traders,” he says.

Getco’s story parallels the changes afoot. Tierney, a cerebral economist and philosopher, began trading options on the floor of the Chicago Board Options Exchange in 1993. Schuler, a gregarious futures broker, started out in 1981 on the floor of the Chicago Mercantile Exchange and eventually opened his own firm. Acquaintances from the clubby world of Chicago’s financial markets, they started talking about going into business together in 1999 and set up Getco that year as part of a vanguard of floor traders migrating from the pits to “upstairs” computerized trading rooms.

Early on the firm operated out of space in Schuler’s firm barely big enough for a couple of desks and computers. For trading talent the partners scoured nearby Illinois Institute of Technology in search of skilled videogamers. As Getco grew, they bought gear from dying Internet companies and coded it to operate with ever less human intervention.

Sidebars:
High Frequency Who’s Who
Trading for Dummies

Special Offer: Free Trial Issue of Forbes


From the get-go the strategy was to trade fast, furiously and electronically. Getco’s first point of attack was futures, which went electronic early. Tierney and Schuler programmed their computers, and the people manning them, to offer quotes and execute trades more quickly than rivals. Then, when the market moves, to do it again. By posting bids and offers for the same securities simultaneously, they are able to scoop up a spread of a tenth or a hundredth of a penny per share thousands of times a day while limiting the capital at risk. What Getco gives up by capping its risk it makes up for in volume. The company currently trades an estimated 1.5 billion shares a day with 220 employees and offices in Chicago, New York, London and Singapore.

Computerized trading is hardly new nor is the demonizing of its effects. The era of floor-based markets started drawing to a close with the popularization of Nasdaq’s electronic system in the early 1980s. Program traders were the early electronic whiz kids until critics pinned the blame on them for the 1987 crash and circuit breakers limited their influence. A decade ago people working the Small Order Execution System, a.k.a. SOES bandits, began minting money by arbitraging spreads created by lags in the speed at which disparate Nasdaq marketmakers updated their prices; the dot-com bust eventually laid them low.

Others have shown impressive stamina. Former math professor and code cracker James Simons founded algorithmic trader Renaissance Technologies in 1982. But his firm came to true prominence only with the hedge fund boom of the past decade. Last year its flagship Medallion fund (assets: $9 billion) was up 80%. Simons ranked 55th on FORBES’ 2009 list of the world’s billionaires.

Dissatisfied with the duopoly the NYSE and Nasdaq enjoyed, then SEC Chairman Arthur Levitt (now an advisor to Getco and Goldman Sachs) in 1998 pushed through Regulation Alternative Trading Systems. Reg ats gave rise to a plethora of so-called electronic communications networks that made markets in stocks, or simply matched buyers with sellers. Two years later the exchanges began quoting prices in decimals instead of fractions. Overnight the minimum spread a marketmaker stood to pocket between a bid and offer was compressed from 6.25 cents, or a “teenie,” down to a penny.

In classic Wall Street fashion traders set about finding new ways to earn a living. Some were nefarious. In 2004 seven NYSE specialist firms paid a quarter-billion dollars to settle charges of front-running clients.

Others viewed electronic markets as legitimate opportunities. The big wire houses hedged their bets by taking stakes in the various electronic communications networks that emerged in the 1990s. In 1999 Goldman Sachs paid $550 million for Hull Group, which used computer-based algorithms to trade equity options. “An unsustainable model” is how Duncan Niederauer described floor trading to forbes a year later. A Goldman derivatives trading exec at the time, he now runs the NYSE.

The final structural move that set the stage for the current electronic trading revolution was Regulation National Market System, put in place in 2005. Previously brokerages were, in theory, obliged to offer clients the best possible execution of stock orders. But it was left up to each firm to determine whether “best” meant the fastest or at the most favorable price. That left brokerages plenty of wiggle room to match buy and sell orders internally and pocket the spread, or send them to exchanges that paid kickbacks for order flow.

Under Reg NMS, by contrast, the SEC decreed that market orders be posted electronically and immediately executed at the best price available nationally. To Getco and its high-frequency brethren, Reg NMS was like catnip. Many began posting continuous two-sided quotes on hundreds of stocks. Some sought to arbitrage the tiny price spreads that existed at any given moment between buy and sell orders. Others, known as rebate traders, profited from payments for order flow the exchanges offered. Latency arbitragers, like the SOES bandits before them, sought to scoop up price differences resulting from momentary time lags between exchanges.

Today hundreds of firms are vying for a piece of the high-frequency action–huge ones like Goldman and Barclays Capital, hedge funds like Citadel and lesser-knowns like Getco and Wolverine Trading. Lime Brokerage, housed in chic lower Manhattan digs with a rooftop garden, handles trades for 200 high-frequency trading firms and individuals. Like hedge funds in the mid-1990s, high-frequency traders are popping up practically every day and attracting leading talent. Vincent Viola, who headed the New York Mercantile Exchange, recently opened Virtu Financial and lured away Christopher Concannon, former head of Nasdaq’s transaction services. Private equity money is rushing in, too. General Atlantic reportedly paid $200 million to $300 million for 20% of Getco (Tierney, Schuler and employees own 80%) in 2007. Last year ta Associates acquired a stake in RGM Advisors and Summit Partners bought into Amsterdam’s Flow Traders; deal terms were not disclosed.

Sidebars:
High Frequency Who’s Who
Trading for Dummies

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With so many players, high-frequency trading has morphed into a technology arms race. In a well-publicized case, the FBI arrested former Goldman employee Sergey Aleynikov in July for allegedly stealing trading algorithms. Separately, Citadel claims in a lawsuit that Aleynikov’s new employer, Teza Technologies, may have got illicit access to trading software it spent hundreds of millions of dollars developing. Teza has not been accused of wrongdoing by the government.

Making it in high-frequency trading these days requires the latest technology. Lots of it. Getco won’t talk details, but others will. Infinium Capital is the biggest marketmaker in natural gas futures and runs its computers in 100,000 square feet near the Chicago River. The core of its operation is 40 racks of servers overseen by quant traders who man up to a dozen screens each.

Infinium’s operation runs on a piece of the public electricity grid backed up by two separate power substations and 196,000 pounds of batteries. Not safe enough. Infinium is paying to install a 2,000-kilowatt diesel generator just in case. Infinium taps into the CME Group’s computers, housed on the same floor of a data center, via dedicated fiber-optic lines capable of transmitting up to 5,000 orders per second with a lag time of no more than 10 milliseconds. Infinium has other servers strategically situated near exchange computers in New Jersey, London and Singapore.

The high-frequency boom is reshaping securities markets everywhere. Four years ago 13 people from TradeBot, a Kansas City trading outfit, left to form a new ECN called Bats Trading. Getco, Wedbush Morgan, Lime and seven big banks are now investors. Bats was granted full exchange status last year, adding a level of legitimacy and eliminating a time lag in reporting trades through another exchange. It now handles nearly 12% of daily U.S. stock trades. Direct Edge, a rival backed by Goldman, Citadel and Knight Trading, handles another 14%.

What’s not to like? From a narrow perspective, the robot traders seem to be enjoying an unfair physical advantage over other investors. One eyebrow-raising reality is that a big chunk of high-frequency profits derive from jumping into markets before small investors can. In the high-frequency world, the 20 milliseconds it can take quotes to travel from Chicago to Nasdaq’s market site in New Jersey (the flashy Times Square one familiar to the public is a TV prop) is an unacceptable lag. So interminable, in fact, that it gave rise to the entire strategy known as latency arbitrage.

The need for speed, in turn, has led to a rush for real estate as close to securities exchanges as possible. In Chicago 6 square feet of space in the data center where the big exchanges also house their computers goes for $2,000 a month. It’s not unusual for trading firms to spend 100 times that to house their servers, says Scott Caudell of 7ticks, which manages dozens of firms’ servers there. Now even the tradition-bound NYSE plans to open a 400,000-square-foot tech center in New Jersey and is taking orders for server stalls.

Does this institutionalize an unlevel playing field? It does and it doesn’t. Small-fry investors are cut out of the business of making 0.1 cent markups. But this isn’t what the fellow buying 1,000 shares of ExxonMobil should be worried about. For him, the risk is that he pays 5 cents a share too much, only to see the quote fall back a nickel a few seconds later, perhaps because brokers in the middle could see what he was doing but he couldn’t see what they were doing.

For years the regulators have tried to make trading fair by putting bids and offers out in the open. When Levitt took over the chairmanship of the American Stock Exchange 31 years ago, the talk was of a “composite limit order book” that would make it harder for middlemen to pocket undeserved spreads. That idea didn’t fly, but variations of it lived on in all sorts of rules designed to force transparency on the market. The trouble with such rules is that they can’t force anyone to really show his hand. A reg can mandate that a 10,000-share order be put on the tape within a certain number of seconds. It can’t mandate that the hedge fund trader placing it reveals his intentions for his other 90,000 shares.

No surprise that today’s order books are filled with feints and parries, made and withdrawn in a blink of the electronic eye–1,000-share bids and offers that are stalking horses for million-share moves. Unfair to the little guys? Not necessarily. Their salvation comes from volume. If enough shares move every second, it is less likely that they will be gouged out of a nickel spread.

Another controversial offshoot of high-frequency trading is sponsored access, which already accounts for 15% of Nasdaq activity. In the old world traders were required to send every order to a registered broker-dealer who passed it along to an exchange or executed it themselves. With sponsored access, traders send orders directly to exchanges. This has raised concerns that a lack of oversight could lead to the sort of disaster that overtook derivatives during the financial crisis.

Some high-frequency traders are sending out 1,000 orders a second. In the span of the two minutes it typically takes to rectify a trading system glitch, a careless trader could pump out 120,000 faulty orders. On a $20 stock that represents a $2.4 billion disaster. Without better controls, “The next Long-Term Capital meltdown will happen in a five-minute time period,” warned Lime Brokerage in a June letter to the SEC.

While many market centers have adapted to cater to high-frequency traders, dark pools have adapted to evade them. Seth Merrin founded Liquidnet in 1999 as a place where professional money managers can swap large blocks of stock anonymously. It’s the successor to the brokerage work that used to keep block traders at Weeden & Co., Goldman and First Boston busy decades ago, when the NYSE ruled Wall Street but a fair amount of its trading took place upstairs. The goal of Liquidnet is to avoid tipping off the market, including high-frequency arbitragers, that a big order is in the market and moving prices.

Merrin, even as he battles a bad market for new offerings and a legal dispute over patent infringement, aims to take Liquidnet public. The firm already handles 61 million shares a day, and Merrin views himself as something of a crusader who is enabling mutual funds, pension plans and other investors to trade at the best possible prices. All told, crossing systems like Liquidnet and Credit Suisse’s Advanced Execution Services (300 million shares a day) handle about 8% of stock trades and are expected to control 10% by year’s end.

The problem with such liquidity pools is that they are in fact “dark,” meaning they conceal their orders from public markets. What’s more, they piggyback off publicly displayed bids and offers rather than adding to the liquidity pools that determine them. That, in turn, has led to charges that they are depriving investors in both lit and dark markets of the best possible prices. Thus the calls for heavy-handed regulation or an outright ban.

Proponents of Big Brotherism should stop hyperventilating. The high-frequency engineers are already on the case, sniffing out when dark pools are trading at the midpoints between public bids and offers and posting their own prices around them (and, in turn, forcing the dark pools to come up with countermeasures to the countermeasures).

As this cat-and-mouse game plays out, trading is getting ever faster and spreads ever thinner. This probably isn’t the market that securities market overseers envisioned, but it’s working just fine.

Flashpoint of Controversy

High-frequency trading helps small investors by narrowing spreads and speeding execution. The same can’t necessarily be said for flash orders. Market center Direct Edge uses them to give a small group of clients a one-tenth-of-a-second crack at orders before they get sent to other markets. The practice has been criticized for favoring insiders, and the Securities & Exchange Commission may ban flash orders.