on r.g.p. . good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for october eighteenth two thousand and twelve tomorrow marks the anniversary of black monday in one thousand nine hundred eighty seven when the new york stock exchange suffered its largest single day percentage drop in its entire history now one explanation was selling by program traders exacerbated by human fear and panic so with the rise of algorithmic and high frequency trading what you can see right there behind me how does that increase the robots change the

equation of a crash old speak to next founder that's where you came up with in just a moment air con sader plus a high frequency trading firm started by former citi group exact closed its doors this week reportedly because lower volumes due to a drop in trading by retail and other investors have led to smaller profits for the speed demon this is according to the wall street journal did unchecked high frequency trading advantages drive other investors out of the market and what exactly this have on the algo bots themselves will talk about what it might take to get these investors you and i the average folks and fairness back in the market plus newsweek shuttering its print edition is this part of a larger trend we're seeing firsthand in the media biz the move of mainstream media online to compete with the growing blogosphere and alternative media is growing like wildfire we'll talk about it let's get to today's capital account.

so today the c.e.o. of p. and c. financial services reportedly told c m d c that computer hackers pose an increasingly grave challenge to the u.s. banking system this comes of course after last week secretary of defense leon panetta said this about threats facing us in cyberspace and potential attacks. the collective results. of these kinds of a. could be a sharper pearl harbor wow false flag or not it underscores the increasing role and importance of computers and software everywhere but for our purposes we'll focus on the role in the banking system and financial markets and perhaps there is

no greater example than the rise of the quantum computer algorithm son executing at breakneck speeds now dominating the stock market in fact in the same time it took me to say that last sentence around a half a million orders were placed i'm told now is the algos had something to say to us mortal humans who dare to dabble in the same stock market we imagine it might sound a little like this. really you know. i know that you're. pretty close. friends. and maybe you were afraid of change for good reason thanks to the company known as we know too that this is what the change looks like this jeff shows the rise of high frequency trading start of the beginning of two thousand and seven to two thousand and twelve right there you're seeing in kind of the height of it now this animation became very popular on the blogosphere around the time of night capital's high speed algo trading debacle

over the summer here to tell us about it in person though the issues and the practices of high frequency traders from the front lines is next founder eric on seder so first let me just say thank you so much for being on the show we're so excited to have you. because although i cannot tell you how many tweets i got from people from people in the industry saying this guy was ahead of everybody else he is a trailblazer in this industry and in this space so first just for our viewers i don't know you tell us what you do in briefly what your role is in this whole kind of high frequency trading space. well i like the process wasn't there you know i've been working with sushi since eighty six and six or seven christian one flew into this summer in this office. and so had a real time system of interest for us since then and. you know

we assemble it to. get it put it together package it in and so to subserve. and then what about at the high frequency trading because you've really seen it from the frontline so what's been your role in monitoring that. part of what we do for a real sense of service is not a sort of you know a second by second because i was looking at it from many different angles and we have some of these changed it's for example one example opened up within seconds something was wrong which is a lot less than it took knight capital to. people argue way too long to figure out what was going on now you watch markets very closely you've been watching high frequency trading for a year or so when did you really see it take off because i know i've been told it kind of started to get its worth around eighty six but when did it really explode in july the seven words the first occurrence we started seeing these new algorithms

that were lasting lots of food orders in the morning and then when did you really see the volume any amount of high frequency trading take off. well of the house pretty much was the birth. never really have an acceleration period it was pretty linear from there i go up and down towards the general. trend. ok and i know because when we were talking you said that after the passage of reagan m.s. you saw a kind of explosion go on why was that a pivotal turning point. as it was a regular asians that industry doesn't suit says you know two thousand and six and it was. put into place so. you know it would change the structure of the market and took a couple months to figure out how to support it. but then that exploit a way they did right you know this exists so then let's talk about some of the

issues and the concerns surrounding high frequency trading for market participants both for individual investor retail investor but also on the m. pact on the market as a whole because it's hard for me to imagine that it's good for the ecosystem. or story diversity or existence is boils down to the system where everybody you can't compete. people who are really going to. lose of dollars worth of equipment. because. you have to do. informational on par who are going to mass what about for the average trader though just should it matter to them that they can't exploit a millisecond. no not a lot and the problem is that well there's a couple problems one without the versus diversity approach of spreads whenever something unexpected happens like perhaps google safford him it could seriously

impact the market in a way that. could cause prices based on some work because he promises to severely affect you. and so we that risk is there because people the diversity of projects different viewpoints on the market and maybe we're going to buy in more than ten percent there are aren't going to be there because the information they're receiving is delayed or is untrusted or do the changes might selectively cancel some orders and others there are going to be reluctance to pull the trigger and so you don't really have the buying power available it's not that they are any more and is there a problem kid that without those folks in the market you have the algos that are all reacting that are providing the illusion of liquidity and that they're all programmed to pull out when they catch any signs that things there are i know yes that you saw the just evaporate up from google which was pretty surprising

to see it impact the market like you did a minute from a pretty pretty moderate. absolute absolute. well we were on the edge of a song as long as no other bad news came out the rest of the day would be fine if one day we're going to get we're not going to be so lucky to get away from that. and if. the average investor has those sounds that everyone sort of when they go to buy or so they're going to be facing this pocket of liquidity. for example using murder which started the moment when the regulators those you know that are you know suppose these murderers and it's usually something that you don't have we're going to war but let's say he makes a mistake who is super computers and he's not. been exposed to some of the

pros so he's going to get. the premises it is. just. so right right so there are a lot of consequences there before we get further into them and also how we can kind of i guess some of this i do want to ask you to clarify for everybody because since the flash crash and since knight capital we hear a lot about high frequency trading we hear a lot about algorithmic trading there are often lumped together but they're not the same thing so can you just differentiate for us how you think about algorithmic versus high frequency trading and any misconceptions you want to clear up. well there is a saying again this is. around tables discussing how to define a. how do you define eye frequency trading trading that is based on speed of oh yes you have to because. it's about.

having social order to be able to do those kinds of the and that algorithmic is kind of the informational aspect right this software or the cognitive ability to execute these kind of trades yes yes that they could have been definitely over so that so there is overlap so one question for you is which is the more exploitative or or the edge really coming from is it coming from the algorithmic software or is it coming more from this speed you know it's not really it's or however you can see or some kind of phone use of are exploiting the regulations are now on the rules rather than a sleaze are the rules you know we're really concerned with we're concerned with how fast trading goes we're going sort of those who broke the rules right so you're saying to me you know it's not understanding every technical thing it's about following the rules and just to give one example of how some of these tactics is

manipulative tactics play out and can affect the whole market you were just telling me one example of rattling the beehive what what does that do what's the impact there i mean to be i mean to be high. if you know if the workers i was i'm quoting you take your positions with. you because. there's definitely ways to extract value. and it's americans receive that we see. you there on your stupidity and we're some of these storms hundreds of millions of dollars and we're going to do that. right and then how does this play out and market with exceptionally low ball attila because right now the vix is that fifteen pretty much doesn't get lower than this one how does that work when volatility is this low. well. in spite of those silly being the nobody wants to put their orders in the book anymore we're just about to quit or you know what one of the

police orders to buy or sell at the market was higher or lower because they find out if you don't have a speed of news there will you feel when it's through there isn't and so they chase the shredded cheese around you more. last minute placing orders or you know aren't going to see that because. what you end up with is less need to be that it will be a liquidity machine that somebody does need i don't really know how to really romas the more you can do it with in terms of the oh wow ok well eric i'm an old you're right there are kinds of founder of man x. is with us he'll be back in just a moment on the other side of this break still ahead we've talked before about regulators being late to the party with high frequency trading so is there any hope that enforcing the rules will happen and even if they are is that enough to curb some of these problems we'll get to that but first your closing market numbers.

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the a. cuckoo a. guru a . koan. you. welcome back as i mentioned at the top of the show to mars the twenty five year anniversary of what's known as black monday it's the day the stock market

plunged in one nine hundred eighty seven that no trader will ever forget from those i've spoken to so fast forward and there are many many more algorithms that are that are responsible for executing that the trades are going on with the new york stock exchange so does that make a crash better or worse more or less likely let's ask our ask our gas because he was watching all of this so closely aircon sader founder of nan x. so financial markets mr hunter of always been volatile they've always had wild swings we have the anniversary of the crash of one nine hundred eighty seven to remind us of that now that so much of that is done by computers so much of the trading is that better because there is less of the human fear and panic or does it simply mean that there are more compounded by how fast they are and compressed by the high frequency trading well in order to go faster and that's really what this is all about you have to just go seems you know what's the exchange game

a little you know is it ok to the emergence of down ten percent. or so what happens is you get insults out of the whole group who are going to let me use and some people could figure out how to cause the lemmings to do things they don't want to do. and it really the market. you've got a very complex system here and complex systems or no you know perfectly well things or most of her so all all that's going to take is a better use of atoms when are you who googles. because you know with as you just shut down we're some of them just all living on top of each other. so do you think it's that crashes if we if we had one that there is the potential for them to be worse than they used to be when it was humans doing all this. worse i don't know.

salute them to ok the problem was not really. well when you have these car conquered rules and we're going to hold the stock and in whose orders of trees are going to be broke you know whose are not going to be broken. and the solution still have confidence ok and that's those are a couple of issues that i want to get into because one of the things i often hear from from folks that watch this is that it's just gotten so fast and regulators are just so behind and so late to the party i want to know your view on that and especially since last month we did get a fine from the f.c.c. to the new york stock exchange for them getting information more quickly to proprietary the people that had their proprietary feed versus everyone else so what do you think is the state of regulation of this industry well you know you

can see trading you don't have to understand where things are going to go and it's really all over one class of people who are not following the rules is so simple and the following. but yes you see what is simply enforcing the rules for the first time since reagan is perhaps. what probably more important than the climate so worrying on the phone when. you can see this these things are not legal these things have become so commonplace you know my theory is the scene was going to go full tilt and now storm forcing there's we're going to have a body of work for you to watch through because they come wow but do you see an impact when you're looking at your screens after we have that enforcement action or there was another against a firm for layering in knight capital mary shapiro wouldn't cancel the trades for

knight so what in fact you say well yes well it's interesting so. i'm from the merrier. remember i get color of my triggers that. if they are very dark that you can make their own car well. there are two classes of. people. we haven't seen significant changes in curtains. in responding to you so. we suspect my suspicion is the reason the seams of these high who train from suppose are is because. they're not. going to war because they hear they hear exploited exploit break the rule. here and that will not lead to profitability they're going to pull out and it's interesting you know they're claiming you know not being profitable now when it wasn't very long ago some of

them had known you days straight in a row or profitability which is just unbelievable they would do with an ounce there would be if they were on a couple of days of marriage just on. just as some people didn't raise their eyebrows right right so you think that these stories about frequency trading firms shouting because that they can't be as profitable anymore do you think it's actually more tied to the fact that they're starting to be regulated yet think yes i'm sure i'm sure why now and you actually do notice a difference in the manipulative processes on your screens since these enforcement actions absolutely crystal clear. wow so do you think there needs to be more actions that kill switch transaction tax or do you just think the z. to be enforced what's on the books if it forces on the books we renew transaction tax you when you remember. it of the things that they're proposing it really is they're going to try to pass new regulations when they're not going to important

system regulations take them seriously i wouldn't take them seriously if you know that is of course what regulations you're you have your new business premiums i totally hear you there before we go then what's your best advice for the average investor if they want to have a fair market. you know the rules. are simple and i just want one more second before we go should occupy wall street be on the street protesting this you mention them this trading is the poster child for wall street protesters and good looking or just oh you just don't know yeah well we know a lot more now after hearing from you thank you so much air con seder founder of man x. for being with us today. ok

let's wrap up with a loose change demitra kofi anan is riddle me this what is going on in media it's a story we hear many times but hey perhaps here is another sign of the times newsweek magazine announced today that it is ending its print edition moving to an all digital format once upon a time the magazine claimed it was the most efficient way to stay up today. now more than ever newsweek is what the news weekend was meant to be the most efficient way to stay up to date with your work the stories of comprehensive and timely the photography is dramatic the sky is unlike most of all there's news week unbiased journalism. unbiased journalism is one way to gain subscribers i guess and now it's not paying the bills if you're

a print magazine like newsweek it cost forty two million dollars to print and distribute the magazine dimitri what do you think that this is symbolic in terms of what's coming up in the world the two things struck me how much things have changed since a stay at the speed you can't possibly stay up to speed if you were to wait for used to be so for the coming then was bias there's no way you're going to make any inroads in media today if you're not bias it's a whole like fox news literally change that paradigm and not the right so that everyone has to be biased so those two things straight out well not everybody but if i mean you know one has a point of view today that's not to say by bias right everyone's got a point of view and they make it very clear this is this is my point of view and i'm coming at you from this direction so i just invents interesting but i mean they've. changed so much of what i would get a newsletter ninety nine from the daily reckoning that was extraordinarily rare both people weren't getting the news a newsletter right now you have blogs people just go on line of the river they want

and it's democratized things as well but it's also created like you were talking about hype from concentrating before this is like high frequency information yeah i'm going to very much that much less fact checking so you get a lot of crap in a lot of stuff comes out as rumors and so it's really interesting how you have to be more kind of. the arbiter of you know checking things out and what's true and what's false and whatever but i think that this speaks to too there are barriers to entry there are so many good sources of information that is the on the blogosphere or alternative media that i mean it only makes sense that like the big firms to compete they they need to be and it would be gauging in the alternative way yeah for sure they need to and i'm sure there are very mean i'm a lot of people go there still go to the york times or the guardian they still go to the financial times but we're. water and water may float a comet are coming to sources on you too but it's going to go exactly it's really great because it does democracy information and your brain has your brain this plan

there's a plasticity to the human brain so people have a ball over this very supportive time to adjust the way they pore through information but it's interesting i feel like reading a hard copy but i mean i agree and you got to use i mean i was really a newspaper guy. i can't part with them let's remember greg smith for a moment before we go remember he was the former goldman sachs executive director who resigned very publicly in his new york times op ed in his i quit letter greg smith a mid-level executive for goldman sachs said he was sick of a culture where clients were called muppets and employees were expected to hunt elephants by getting clients to make big trades that led to big profits for goldman . so we don't have much time dimitri but this is a war of the muppets because greg smith is publishing his tell all book it's coming out soon we're trying to get him on the show come on greg and goldman sachs is firing back a head of the book saying that he wrote the op ed after being denied

a raise to a million dollars in a promotion so they're totally taking the typical oh this is just a disgruntled employee kind of sneering attack what do you think i don't know the parts of the book that i have at least seen tease they don't really seem that in thrall and if you could do that better job well you know what why aren't when i read the story of course i was sort of a first right but you know goldman sachs has been good at spinning the truth putting lives and turning them with the good out it's you know what i'm going to i'm going to hold the post until you come on our show i'm going to wait until till he comes on the show with the president's original i reached out to your publisher we want we want to get back to us we want you here to slay the new bosses. got all right that's all we have time for there we're going to leave it there for today thanks for watching be sure to come back tomorrow in the meantime you know you can follow me on twitter out lauren lyster or you can go like our facebook page right there tell us what you think about grades and this you can give us feedback

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