good afternoon and welcome to council 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 the increase of robots change the equation of a crash old speak to next founder that's where it where you came up with in just

a moment air con sader plus a high frequency trading firm started by former citigroup execs 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 box 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 a 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 current. could be assured 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 if the algos had something to say to us mortal humans who dared to dabble in the same stock market we imagine it might sound a little like this. really you know. i know the truth. and maybe 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 hunt savior 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 to process lots of data other than working with sushi since eighty six so. some christian who want to do this summer in the desert there's a. real time system of interest for those since then and only you know symbolism. give it put it together package it and

so to some service. and then what about the high frequency trading because you've really seen it from the front line so what's been your role in monitoring that. part of what we do for a real sense of service is one sort of you know sort of a second because i was looking at the many different angles and examples of these changed its 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 do 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. so why were the first footprints when we started seeing these new algorithms that were lasting lots of orders in the market and then when did you really see the

volume in the amount of high frequency trading take off whoa that was pretty much was the birth. you never really have an acceleration period it was pretty linear from there are a lot of down towards the general. trend ok and i know because when we were talking you said that after the passage of reg and m.m.s. you saw a kind of an explosion go on why was that a pivotal turning point. but rated as it was a regular asians that industry two thousand and six. two thousand and six and it was. good to play so. you know i really changed the structure of the market and took a couple months to figure out how to support it. but then exploit a way they did right yes that's existed 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 to diversity or existence is boils down to the chase to where everybody you can compete on speed you people who are willing to invest. leaves of dollars worth of equipment. wants. to do you know i'm going to say informational on target but 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 of the problem is that well this of a couple problems one without the burst of diversity the curse of spreads whenever something unexpected happens like perhaps google safir jim it could seriously impact the market in a way that. could cause prices based on some working closely promises

to severely hurt you. and so we that risk is there because people the diversity of projects with different viewpoints on the market and maybe we're going to buy more than ten percent there are are going to be there because the information they're receiving is delayed or is untrusted or the changes might selectively cancel some orders and others are going to be reluctant 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 it was that we 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. to our absolute absolute. well we were yes it was long as long as no other bad news came out the rest of the day would be fine if one day we were going to get we're not going to be so lucky we're going to get away from that. and enter the. carriage of this are going to say sounds that everyone sort of knew to go by or so this is part of. it was like for example use murder which sort of the moment when regular tells you there is murders and it's usually something that you don't have we're going to war but let's say because you know it's in the. news supercomputers on usenet. and you know it's a mistake into the lives of the pros so he's going to get it if you will promise is

not. going to. 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 do some of this i do want to ask you to clarify for everybody because since the flash crash and sense knight capital we hear a lot about high frequency trading we hear a lot about algorithmic trading they're 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 no state again this is. around he was discussing how to define a. how do you define eye frequency trading trading that is based on. a book. you have there because. it's about. how you special order to be able to do those kinds of the and algorithmic is kind

of the informational aspect right this software or the cognitive ability to execute these kind of trades yes yes that they can they can 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. or however you can see or some kind of the phone is of are exploiting the regulations are now on the rules rather than a sleaze are the rules you know we're really concerned with conservative how fast trudy 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 ever rattling the beehive what what does that do what's the impact there i mean to be you're going to be high. you know if the market is those and you take your positions with. you because. there's definitely worst of serbia. and its americans received. you there on your stupidity it was somebody sorghum hundreds of millions of dollars and we're going to have to do that. right and then how does this play out and market with exceptionally low ball until it 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 it is. in spite of all it's really being that nobody wants to put their orders in the book anymore which is provided with you know what one of the police orders to buy or sort of the market was higher or lower because they find out that

they don't have a speed it is durable you could still win and so there's a bit and so they change their strategies around more and i either last minute placing orders or you know aren't promising because. what you end up with is one as well. be that we build a liquidity machine that somebody does and you either do it now 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 next 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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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 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 air consider 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 your neighbor and that's really what this is all about you have. means you know what's the exchange game. you know is it ok to boeing workers are going to percent. or so what happens is you get insults out of the whole group who are going to let me use. some people to figure out how to cause the lemmings to do things they don't want to do and in the middle of the market. you've got a very complex system here and complex systems are no. perfectly. good things or most of her so all all that's going to take is

a better use of the women who were google's. 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 no absolutely ok the problem was not really. well when we have these come come ghouls and we're going to hold the stock in and whose orders are going to trees are going to be broke you know i'm going to be broken. into slowly and 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 how to get to trading to you know how to understand where things are going to you know it's really all over one class of people who are not following the rules it's simple and the fine. but yes you see was simply enforcing the rules for the first time since reagan is perhaps. what probably more important than the climate so to worry him on the phone which 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 work for you to wall street 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 and knight capital mary shapiro wouldn't cancel the trades for knight so what in fact you see well yes well it's interesting so. i'm a member of the myriad ship. remember i get color of my triggers that come up it's the garbage where you can make a car well it shows you there are two classes of. people. we haven't seen significant changes in the birds. in responding to you so. we suspect my suspicion is the reason that it seems some of these homes you train from suppose are is because. they're not see their own you know the war because they

hear they hear exploited exploited broken 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 no ego in a row or profitability was just unbelievable they would do with an ounce there would be they were on a couple of days and they were just on. just as some people didn't want to raise their eyebrows right right so you think that these stories about frequency trading firms shutting because there they can't be as profitable anymore 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 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 these need to be enforced what's on the books if it is force on the books transactions and i was we were. going through. it with the things that there are a person who really is going to try to pass new regulations where they're not going to important system regulations taken 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 mentioned them this trading is the poster child for wall street protesters are good looking people just don't know you you just don't know yeah well we know

a lot more now after hearing from you thank you so much eric consider 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 steer your to do it with the stories of comprehensive and timely the photography is dramatic the sky is unlike most of all there's a new 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 because it's a whole like fox news literally change that paradigm and not to say 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 going 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 you know these things have changed so much i want everyone i would get a newsletter ninety nine from the daily reckoning that was extraordinarily rare move people weren't getting there was a newsletter right now you have blogs people just go online and they were ever they want and it's democratized things as well but it's also created like you were talking about hype from concentrating before there's a high frequency information yeah very much that much less fact checking so you get a lot of crap and a lot of stuff comes out as rumors and so i mean 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. a lot of people you know they still go to the york times or the guardian they still go to the financial times but we're. the water may flow to come it are coming the source is on you too but it's going to go exactly it's really great because it does the mark has the information and your brain has your brain this plan there's the plasticity of the human brain so people have a vault over this very for pretty time to adjust the way they parse the information but it's interesting i feel like reading a hard copy but i mean i agree and you got to get 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 and 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 there 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 first right but you know goldman sachs is good at spinning the truth putting lies and turning them with the good out it's you know what i'm going to i'm going to hold a press judgment until you come on our show on the way until the till he comes on the show with the president's original i reached your publisher we want we want to

get back to us we want you here to slay the. got 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 you can go like our facebook page right there tell us what you think about grades and you can give us feedback catch any shows you missed you tube dot com slash capital account watches the h.d.d. on hulu hulu dot com slash capital dash account of lou rockwell on tomorrow stay tune but for now have a good night. three . three. four three. three three three. three

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