What are your thoughts about program trading? [See Appendix 1 for definition.]
I hate it. There used to be a natural ebb and flow in the market, but program trading killed it. Those firms
doing program trading wield extraordinary power to move the market, and the locals have simply become
accomplices. I'm not just paranoid, because I've adjusted to it and been successful. But I hate it.
Some people say that all this criticism of program trading is a bunch of nonsense. Well, they are idiots.
No, some of them are very intelligent people. No, they are idiots. I can prove to any one of them that they are idiots.
How do you prove it? There is something I would like the regulators to investigate. The market closes near the high or low of the
day much more frequently than it used to. During the last two years, the market has closed within 2 percent of the
high or low of the day about 20 percent of the time. Mathematically, that type of distribution is impossible by chance.
You talk about program trading as if it is immoral. What is unethical about trading stocks against futures? Because the program traders also have the other side of the equation to do. You have the so-called Chinese
wall in investment banking, where they don't want the arbitrageurs and investment bankers on the same floor for fear
they might talk to each other. Well, I would like the SEC to explain to me how they can allow agency program traders
sitting alongside principal traders for the firm's own account.
Your example introduces an element of frontrunning, which obscures the basic question. What I am trying to get at is: What is immoral about buying stock and selling futures (or the reverse trade) because prices in the two markets are out of line? Because I've seen situations in which a firm has information about a debt/equity swap a day ahead of time.
For example, when the state of New Jersey sold $2 billion worth of stock and moved it into the bonds, this firm knew
about it the day before. Since they knew they were going to be selling $2 billion worth of stock the next day, from
4:00 to 4:15, they sold thousands of futures contracts to set up the trade. That stinks.
