Money Bots: How the Performance and Value of Wall Street Corporations Became Irrelevant.

Money Bots: The Truth Behind High Frequency Trading

Al Jazeera (2021)

Film Review

With high frequency trading, the performance and value of a company becomes irrelevant – all that matters is competing trades faster than anyone else. With money bots, many stocks are held only a few seconds before being resold.

This documentary concerns the trading “bots” that are programmed to carry out complex high frequency stock trades without any human input. The bots are triggered when conventional traders (eg pension funds) issue large orders. Because they can consummate trades much faster, the bots buy the desired stocks and then sell them to the pension funds at a higher price. Because high frequency trading is totally unregulated, this is perfectly legal.

At times high frequency trading can have real time effects on the whole market, as in May 2010, when high frequency trading caused several stocks on the Mercantile Exchange to crash before the entire exchange was shut down. A second “flash crash” occurred in February 2018, when trading bots caused the Dow Jones to lose 1500 points in a few hours (the highest percentage loss in history)

The most interesting part of the film concerns the computer scientists who developed the algorithms (1991) allowing money bots to instantly capitalize on large orders submitted by human traders. The bots were based on an app they originally developed to predict the outcome of black jack and roulette games.

In all cases, success in high frequency trading depends more on location (as close as possible to the designated exchange) and access to the highest speed networks than on true predictive ability. According to whistleblowers interviewed in the film, the most successful high frequency traders have employed “cheats” of some type.

The film can be viewed free at https://www.msn.com/en-ca/video/movies/money-bots-the-truth-behind-high-frequency-trading-featured-documentary/vi-AAKbJXL

Reverse Mergers: Americans Caught in Chinese Investment Scams

The China Hustle

Directed by Ted Rodstein (2018)

Film Review

This documentary exposes a recent scam which some 400 small Chinese companies used so-called “reverse mergers” to list their companies on the New York Stock Exchange (NYSE) – a move enabling them to attract American investors.

At preset, the Chinese government bans direct foreign investment in China’s businesses. However between 2006 and 2012, two enterprising US investment banks (Roth and Rodman and Renshaw) enlisted small Chinese companies to enter into “reverse mergers.” Locating legally registered US companies that had ceased operations, the two banks recruited Chinese companies to legally “merge” with the defunct companies. This, in turn, enabled the Chinese companies to register on Wall Street and sell shares to US investors.

A pattern emerged, in which Roth and Redman and Renshaw obtained high accreditation ratings from their auditor (Deloitte) and aggressively promoted the stocks. Then they sold their holdings just before they collapsed – reaping hundreds of millions in profits.

Becoming suspicious, Dan David, co-founder of the due diligence firm Geoinvesting, became suspicious and went to China to visit some of these companies. In every case, he found they were exponentially overstating the size and volume of their operations, as well as the revenue they generated.

He first took his findings to the investment bankers at Roth and Redman and Renshaw, then to the SEC (which is theoretically responsible for preventing this type of fraud) and finally to Senator Pat Toomey. The latter was part of the Senate committee investigating n the potential risk China posed to the US economy.

When it became obvious there was no other way to end the fraud being perpetrated on US investors, David began collapsing the share price the companies he investigated by short selling* their stocks.

In this way he ended 40 reverse merger scams by shutting down the companies.

Before the massive fraud came to public attention, public pensions funds lost more than $14 billion in reverse merger scams, with private investors losing $20-50 billion. Rodman and Renshaw was eventually forced into bankruptcy.

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* Short selling involves the sale of an asset that the seller has borrowed in order to profit from a subsequent fall in that asset’s price. It commonly has the indirect effect of driving the share price down.

 

Wall Street: Never Give a Sucker an Even Break

The Wall Street Code

VPRO (2013)

Film Review

While the rest of us are busting our ass to earn an honest living, Wall Street traders are running around thinking up new ways to rip us off. And laughing all the way to the bank. I love the way they refer to ordinary investors with pension funds or retirement accounts as “dumb money.”

The Wall Street Code is all about whistleblower Haim Bodek and his discovery of a secret algorithm used by high frequency traders to rip off mutual and pension funds (aka “dumb money”).

As of 2013, when this documentary was made, 70% of Wall street trading was automated and 50% occurred within milliseconds. When large volume trades are made, they always drive the share price up. This means there’s a distinct advantage in getting your order in before a large volume trade by a pension or mutual fund.

Badek discovered a secret algorithm that alerted unscrupulous traders to large volume trades before they were made public and help them jump to the front of the queue (and purchase stocks before the share price started to rise).

Michael Lewis writes about a similar scam in his 2015 book Flash Boys. The book concerns whistleblower Brad Katsuyama’s discovery that high frequency traders were secretly exploiting minute differences in the speed of electronic transmissions (see Wall Street More Deeply Corrupt than We Thought).

Bodek believes that Lewis seriously underestimates the serious amount of fraud occurring on Wall Street. Bodek’s persistence has resulted in the prosecution of the New York Stock Exchange by the Security and Exchange Commission – resulting in unprecedented fines being imposed.

See http://blog.themistrading.com/2018/03/the-return-of-haim-bodek/