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High Frequency Traders Manipulating the Nasty Sell-Off?

Did the whoosh lower on Monday have anything or everything to do with high frequency traders gaming the system?

According to Jon Najarian the short answer is yes.

And he’s not just talking Monday’s move. He says everything that’s happened in the market since last Wednesday deserves to be the subject of this debate.

Najarian is particularly irked by a move made on July 5, 2011 to increase the capacity of the Consolidated Quote System (CQS) used by the exchanges to 1 million quotes per second – that was a 33% increase.

”The high frequency firms pegged that,” says Najarian. “In a turbulent market (regular investors) can’t even see what’s going on. You have to be one of them."

In other words, Najarian believes high frequency traders are able to use the speed of electronic trading to mask the bids and quotes in the marketplace.

The practice is sometimes referred to as quote stuffing and involves high frequency traders who place 'buy' and 'sell' orders and then cancel them microseconds later in an attempt to slow down the prices seen by regular investors on their financial systems or websites.

”There were times on Monday when latency (slowdown) kicked in and people had no idea (what was happening.)” Although the whole process is complex and confusing – suffice it to say the average investor does not come out on top.

”Guys get lulled in by the machines and then smacked down," explains trader Tim Seymour. "It wreaks of manipulation!”

"(And) because of the machines, things are happening much more quickly and much more deeply," adds trader Joe Terranova.

Any way you add it up, the traders say, it equals trouble.

Jon Najarian thinks its time for the Street to take a stand and he hopes that happens amid reports that regulators have issued subpoenas to firms that engage in high speed trading. "We need the SEC and CFTC to step in and say 'no more.' They're really disrupting it for everyone else."

(For an in-depth look at high frequency trading and the practice of quote stuffing click here and go to New Way High-Speed Traders Get Edge on Investors by Fast Money executive producer John Melloy.)



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Trader disclosure: On Aug 8, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Nathan is short (AAPL) puts; Nathan owns (BAC) puts; Nathan owns (CMG) put flys; Nathan owns (LNKD) calls; Nathan owns S&P 500 puts; Seymour owns (AAPL); Seymour owns (BAC); Seymour owns (GE); Finerman and Finerman’s firm own (AAPL); Finerman owns (BAC) and Finerman’s firm own (BAC) leaps; Finerman owns (JPM) and Finerman’s firm owns (JPM) stock and (JPM) leaps; Finerman’s firm owns (HPQ) stock and (HPQ) puts; Finerman’s firm owns (MSFT); Finerman's Firm Is Short (IWR); Finerman's Firm Is Short (MDY); Finerman's Firm Is Short (XRT); Finerman's Firm Is Short (SPY); Finerman's Firm Is Long S&P 500 Puts; Finerman's Firm Is Long Russell 2000 Puts; Terranova owns (VRTS); Terranova owns (LQD); Terranova owns (IBM); Terranova owns (FCX); Terranova owns (CVI); Terranova owns (AAPL); Terranova owns (GS); Terranova owns (GOOG); Terranova owns (XOM)

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Funds Held May Or May Not Own The Recommended Securities
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