you must pay for it well we also see it in the whole scientific world it's how you scientists convicted over earthquake warning six scientists and a government official were sentenced to six years in prison each for manslaughter by an italian court on monday this is of last week for failing to give adequate warning of an earthquake that killed more than three hundred people in like in two thousand and nine well i know this is going on obviously what about the economists who failed to predict the financial earthquake what's the penalty for them more clearly this type of science of course there is some predictable outcomes in some scientific method but in the realm of economics it's all voodoo and tea leaves raining there is no science behind it it's guesswork and best so we have to make sure we understand that when we're evaluating economists we know that basically and so a bunch of money but has not yet been scientific rules to establish for

economics and it's still very much. we don't really know exactly what makes the economics work yet and in a way it's the opposite in economics in that you hear all the time now the man who predicted the financial crash you hear that over and over every single economist or financial expert announcer introduced interviewed on a television show but you also have this notion that there was there were people like brooksley born who predicted. that fraud would lead to financial collapse right well economics is tied to human psychology and human nature whereas something like chemistry or physics is not tied to those they greenies so in the realm of economics you can see when human nature takes hold of bubble forms like the real estate bubble or the dot com bubble and the protests appends believes are

omniscient they believe they are god and as such no rules apply to them and their ego maniacal behavior is reflected in bubble prices which are like the wax wings of i believe it was melt under the sun there is no crashing down to earth that that's repeated for millennia but this study economics that's human psychology so they failed to predict the earthquake but you know as we've said we've had all sorts of financial earthquakes and currency earthquakes and economic earthquakes across the world in the last five years or so and none have led the way may not have caused more fractures in the market than high frequency trading but here's the headline max from the u.k. computer based market trading beneficial a government study has found no direct evidence computer based financial trading has led to increased volatility or abuse of the markets the study says algorithmic trading automated systems for buying and

selling securities can be beneficial now let me take back her from there this is a lie the government who saw this burning it's a scientist who is working for the government certain john that he says well john barrington you're a liar you don't look at the evidence you don't look at the work of people like myself who have done extensive study into this high frequency trading lanes to flash crashes and market crashes is nothing more than high frequency pilfering and truck running by the biggest. banks from the people in your country and you're legitimizing financial rape congratulations bozo well to equate this to the scientists in italy if they had said earthquakes never cause damage earthquakes don't kill here this guy can see the evidence all around that in fact high frequency trading does not provide all the beneficial qualities that he says they do well this is another kind of a bubble this is

a bubble that leads to you suppose an omniscient god like behavior this is the government government spending bubble where the government would finance people like this with someone with the brain of a pea. brain lizard who is out there are spouting nonsensical trivia and nonsense but believes they are the god. and this is a government spending bubble the government should cut spending up immediately from people with the optimal i like this guy but it's also part of what william k. black was saying to us and our last interview with him is that the city of london goes lobbying for fraud they look for a fraud and they know that there are plans for high frequency trading to be banned in europe there's also a financial transaction tax bill going through congress right now in america so they know that there are lots of desperate bankers they're well fraudsters looking to for a safe haven for their fraud so they're providing this government is no guarantee

that they'll be allowed to operate freely here david cameron is providing cover once again for financial rapists i've watched them on the prime minister question time he's very shorting bullets now the opposition is just asking him simple questions like why are you such an idiot and he's like oh fuck who. didn't you know he's going he's devolving he's devolving forget about scotland the prime minister himself is devolving in real time. so there is this man bart chilton. who is one of the regulators at the commodities futures trading commission texas hold'em time to fold them this was his keynote address of commissioner bart chilton before the two thousand and twelve allegro customer summit in dallas texas on october sixteenth and he said regarding high frequency trading max a few weeks ago the tokyo stock exchange closed due to technology problems we've seen a few contracts shut down for different periods of chicago in new york last month

we've seen market volatility increase wildly natural gas plummeting eight percent in fifteen seconds last year one day silver plunge twelve percent in about as many minutes one energy trader lost one million dollars in one second in a second we saw a crude tumble three dollars a minute last month we continually see sharp rises and falls in precious metals there are numerous other instances and it's a safe bet that there will still be others bart chilton only to see you have to see is correct but. choked on his name comes up whether it's the so over manipulation in london or the box office futures in the united states as name comes up over and over again if you bend to amsterdam you know you go through the red light district and you see women there naked or clashing their breasts and you know that's a sign to come on in and get you know your money taken from you that's par chilton he used to he used to make it a model in the store from amsterdam red light district you know it all looks good

when you get inside though he's not going to do a darn thing about it he's out there just teasing people that don't see him do you see run by former goldman sachs guy gary gensler is going to step in and do some regulation some day there jerry jones or piers firebox to go write a new regulation. so you think their own products so finally you did mention hollywood box office futures contracts is the other thing which is the political futures contracts and those are they're trying to trade those in the u.s. side until they actually get a are they allowed to know which is those. political futures betting they have two markets one for cash one is virtual dollars the virtual dollars are still referenced in the united states as and the charts and the price discovery as an indicator of so-called outcomes predictive outcomes and i know the story very well it's used by the science on the internet as some know outcome predicting

mechanism yes yes and the price is predicting the outcome just like what high frequency trading is trying to manipulate the psychology of the market trying to trigger either buying or selling the same thing here in trade dot com how to swing the prediction markets and boost mitt romney's fortune. so after the last debates max between mitt romney and barack obama. somebody spent seventeen thousand eight hundred dollars on in trade driving romney's contract from forty one dollars up to forty eight dollars well within six minutes it plunged back down to forty one dollars so somebody some mysterious trader lost one thousand two hundred fifty dollars for shares that subsequently collapsed in value they ask was this just someone who made an expensive trade or was somebody trying to influence in trade odds in order to sway perceptions of the race as we saw it on the show many times price propaganda if you create the price the public will buy into that as quote

unquote reality in train is an extremely easy market to manipulate it's routinely manipulated we should all we back to john mccain and his operatives manipulated the john mccain contractor in that race and the manipulating the mitt romney contract to try to influence those outcomes so a couple of things first of all markets are not predictive that's false that's not that's a false so that's brokers tell customers to get them to give them their money that they can they they know which way the market's going and if they if they did they wouldn't be asking you for your money they wouldn't be talking to you they'd be on an island somewhere sipping champagne markets will give you an indication of what people are really going to estimate the future might be today that this is the market price today is what people are estimating the future to me however that does not there's a fifty fifty chance that they may or may not be right it does not predict outcomes that's a completely false statement number one number two in trade as

a virtual market that builds on my technology never got a penny from them thanks dublin based scam artists they have a market that is fairly interesting in terms of making markets and virtual outcomes however if in fact they did begin to tell. if anything with certainty it would be co-opted by shysters as it is doing now we saw the same thing in box office futures contract in hollywood it started predict outcomes for box office a year in advance so what happened n.b.c. took it over they got it they used cantor fitzgerald they moved it to the world trade center and they got it out i don't have it so it didn't have a bad ending but this is not the case here this is a complete scam well in trade itself says they've looked at these trays they saw nothing wrong they said the same thing about the john mccain two thousand and eight manipulation moment as well but just like this sorry john beddington he saw nothing wrong no sign of anything negative or manipulative and high frequency trading here in the u.k. well go get back to serve john beddington the scam artist pheromone adrenaline time

frequency trading high frequency trading most of the time computerized wash trading simultaneously buying and selling to move the price up and down this way perceptions again it's not economics it's psychology people want to invest in a quote of the winner if they can move the price to something that's higher people are going to vote that way because they instinctively go toward the winner people are effectively logs you know you put a little small salt in front of them that's the way that they'll go that's the basic human mind and they know that in this virtual world the price perception you give a higher price and these slogs are cargo if you're french are going to move in that direction and that's it that sounds that sounds simple minded unfortunately when democracy died ten or fifteen years ago in america at a better place now with the slog fests and virtual markets and fake prices and high frequency trading and it is here in the u.k. condoning financial right. all right stacey armor thanks so much for being on the

kaiser report thank you for the second half of the show all be talking about a financial transaction tax to kill high frequency trading. mission free credit take should be free transport charges free. range month free risk free studio time free.

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around tightrope pushing china russia as occupy anger spreads the two parties still dictate their. selections. are. welcome back to the kaiser report imax guys are time now to go to new york and speak with lisa shepard contributing editor of tax notes tax analyst dot com a washington based weekly tax journal she covers all areas of tax law including international and corporate taxation welcome to the kaiser report. thank you for having me all right lisa shepard why should the u.s.

kill high frequency trading as you recently suggested in the pages of forbes magazine ok let's let's get our ducks in a row and think about what we're talking about here we're using high frequency trading a shorthand for some practices that the exchanges allow and the f.c.c. sanctions that algorithmic traders are using so it so we have to sort of keep in mind the s.c.c.s. rule in the whole mess and the promise of my piece is that. we can't really. leave the job to the f.c.c. to stop this part because they created it now we have in the united states lots and lots of markets they are all electronic and the f.c.c. wanted them to be that way we've this is been a sort of thirty year process to make the markets all electronic so computers are

doing the trading but because we now have a zillion little markets we have more than fifty little bitty markets and we have fourteen exchanges none of them have enough depth of volume to sort of really act like the new york stock exchange which means the exchanges pay high frequency algorithmic traders to basically hang around and basically put up price quotes and these are called rebates and the rebate practices have gotten to be such that the exchanges are guaranteeing high frequency traders income from rebates yes only what is the financial transaction tax i would help what is it the transaction tax is a tiny little tax on purchases or sales of financial contracts so that is not just stocks and bonds but it's also things like derivatives it's also things

if you want you can put it on repos you can even put it on currency transactions what's the new york which the european union is afraid to do the point of it is there's two points in it one is to just collect revenue but the other is and this is the economist james tobin. devised this that's why it's sometimes called the tobin tax he wanted to throw a spanner in the works he wanted a tax to impede transactions he because he thought there was too much speculation and we clearly have that situation now. the beauty of this when we get so high frequency traders is they are believed to make very very tiny spreads on the order of a basis point so if you put on a financial transactions tax of three basis points as is being discussed in the united states or ten voices points as the european commission is discussing then you could wipe out their profits and you could you know send their algorithms off

to go and mess up something else right and i guess then for those who are arguing that this transaction tax would impede liquidity the completely missed the point that the high frequency trading in the name of market making is actually causing these flash crashes it is actually impeding liquidity getting ready correct it is creating an illusion of a quick liquidity by throwing a lot of offers out there but then the we know that the high frequency traders because they trade in the death direction of the tape remove liquidity in a down draft and just disappear and exacerbate the situation let's let's also talk about the toxic quotes the french financial transactions tax which is which is which is in place it's not in effect but it's in place would tax unfilled orders this is another thing you need to do if you really want to stop by frequency traders is you have to put it tacks on these offers that they put up and

then withdraw and that's ninety percent of the orders they post are withdrawn lease shepherd in the area of price discovery that is to say the matching of buyers and sellers is that being adequately served by our frequency trading it do are we seeing capital markets functioning in their traditional role of matching buyers and sellers with classic price discovery or with high frequency trading is something else going on what is going on inside frequency traders throw out a lot of prices that they then retract they retract ninety percent of the offers that they make and they do this to head a price where they can have a timing advantage remember that with co-location they have an informational advantage. over the consolidated tape what what what what an order what an order matching server is doing is it's sending from all our

little exchanges in the united states it's sending the orders to a console to another server that's making a consolidated tape and that is supposed to be the national best bid and offer what a high frequency trader can do is that and they can beat that in two ways one way they beat it is sometimes they do get the information before the server that's doing the consolidated tape gets ok the next way they beat it is that they even if they're not getting the information faster they're getting better information they're getting a private cost of mice feed from the exchanges remember that the exchanges are for profit institutions they're making all their profits from fees for have that they collect from high frequency traders for co-location right you're talking about one financial issues here one is front running and the other one is price manipulation

so you're saying that the i'm not really talking about pres manipulation i'm mostly talking about front running right but just to roll roll back a second you're saying that in terms of price discovery moment ago you're saying that the price is is being is being classic buy and sell is being overridden by high frequency trading and so therefore moving the price side of what would be the normal market that's a manipulation of price correct. i would not call it moving the price i would call it knowing the future by having superior information and faster information ok well that would be splitting hairs and a semantical different yeah i saw that when one is probably doing laser work as a what is front running a guys out in front running this is when you guess insider information and people are taking advantage of that information to trade head of everybody else right so that's just basically insiders adding correctly and that is well the exchanges

would say that members have always had these advantages and some of these side frequency traders are designated market makers which means they are entitled to have this information first the funny thing about their designated market maker status is because the exchanges in america are self regulatory organisations they don't have the responsibilities that the old market makers had the responsibility to keep buying into downdraft the responsibility to keep inventory so the securities act of thirty three and thirty four if i recall it states quite unequivocally that the market makers are not allowed to act on price information ahead of their role as a broker so they can let their role as a dealer interfere with their role as a broker so yes it's true that these traders have dual roles as brokers as well as dealers but that doesn't mean that they're read a commit a crime which is what the f.c.c.

is or is not alleging this crime go forward the f.c.c. by what you're saying is allowing this crime to take place they doing so because they're corrupt they're stupid they're inept or all of the above. they were acting genuinely shocked the other day when they. imposed a five million dollar fee on the n.y.s.e. for letting high frequency traders have information ahead of sending the information to the consolidated tape the f.c.c. wanted to create a situation where you had lots and lots of markets because they thought the competition would give you better prices that's sort of not really necessarily happening but they've they've created this monster and i think that they they they couldn't really predict the consequences of what they created remember that one of the things they wanted to do was smash down spreads to nothing we have succeeded in

doing that so much that really the only people can make money in the markets are high frequency traders who are thought to be making only one basis point that's why when we talk about financial transactions taxes of a basis points or more we figure well if this is their profits then we can knock them out with a transactions tax of three basis points or as the european union is talking about ten basis points let's talk about another issue here hide not slide orders what's that all about you know what that's about is you're putting up an order but it's not making it all the way to the consolidated tape what that issue raises is it raises issues of you know broker responsibilities to clients and some high frequency traders are also part of securities dealers so they've got clients as

well as their own proper book and we think that they're doing things to benefit their own prop book that disadvantage the clients the other issue which is a whole issue for another day that this brings up as dark pools which is where the big institutions go. to hide from high frequency traders right ok you're right that is a bit of a side issue the dark pools and the dark it is that it is a side this is a whole part of the shadow banking system but i just wanted to wrap up here and ask you this question in terms of co-location of servers that you mentioned before on the front running of training that high frequency trading is often used to give you an example if i go to my neighbor's home and i stick to bend their gas tank and i siphon gas out of their gas tank. which is similar to coal locating a computer next to an exchange and putting high frequency trading in there to siphon off capital can i go to the judge after siphoning off the gas and claim that

i'm merely making a marketing gas. well a you can you can tell the judge that you're a designated market maker or you can tell the judge that you're a member of the exchange you can tell the judge that the exchanges rules permit you to co-locate for me to have a proprietary feed might permit you to have the proprietary feed ahead of everybody else and then you can tell the judge look exchanges are self-regulatory organizations and all the f.c.c. has sanctioned these practices because the exchanges say they need to get volume to grow so basically what they're doing is they're sort of having these high frequency traders around to create the illusion of volume in their exchanges and the reason we use the word illusion and andrew haldane of the bank of england and use words like that is because we know from the flash crash that these traders disappear when the prices go into a down draft and we also know from the flash crash and this was the see if p.c. working paper that the. they can exacerbate the downdraft by

the act of disappearing on mosse shepherd rather time thanks so much for being on the kaiser report thank you. and that's going to do it for this edition of the kaiser report are with me max kaiser and stacy herbert now with my guest list shepard of tax analysts dot com if you'd like to send me an e-mail please do so at kaiser reported r t t v dot ru until next time nice guys are saying. you know we both agree we agree we ought to bring the tax rates down i felt the same as the president did governor romney i'm glad. you agree let's get back to something the president i agree on and the two you agree that the voters have a choice perhaps that's what you wonder who to vote for when romney and obama agree

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