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Ex-Insider Calls High-Frequency Trading ‘Cheating’

Thursday, 20 Sep 2012 | 12:55 PM ET

High-frequency trading — particularly the practice of “queue-jumping” —amounts to little more than cheating, former Wall Street insider Haim Bodek said Thursday in a CNBC exclusive television interview.

“I felt, I’m playing poker with a bunch of guys, and six months after I’m losing over and over and over, they say, ‘We’re cheating. Didn’t you know? Everyone knew.’ And my problem was after that, I thought that somehow, with my firm, that because I knew how these practices work, I could somehow trade around them. And I came to the conclusion that it is actually an unbeatable system right now,” he said on “Fast Money.”

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"It's a cheap stock; it's a great way to get exposure to the market," says Steve Weiss, Short Hills Capital. Meanwhile Dennis Gartman, The Gartman Letter, explains why Microsoft's balance sheets look like those at a bank. Wall Street whistleblower Haim Bodek, former head of electronic volatility trading business at UBS, says high frequency trading is disruptive to markets.

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“I don’t think anybody can compete that’s outside of this particular practice, and that’s why it’s 50 to 70 percent of U.S. market because the diversity of our algorhithmic trading tradition have been annihilated by this particular practice,” he added.

(Read More: Jim Cramer Slams High-Speed Trading)

Bodek, formerly of Goldman Sachs and UBS, said he had approached the Securities and Exchange Commission last year to flag what he thought were abuses by high-frequency trading mechanisms — carried out with the help of the exchanges, possibly in violation of trading regulations.

“This abuse is called ‘queue-jumping.’ It allows a sophisticated trader to get ahead of, actually, typically institutional, primarily, who are resting on the order book. It happens during a price move.

(Read More: Is Fed Making Life Tougher for High-Speed Traders?)

“What I argue is that this is a corruption price-time priority rules on the exchanges, and that’ll be debated in terms of whether or not that’s fair or not, but I think it’s already pretty much admitted across the board that queue-jumping does happen.”

Bodek said that he decided to come forward after he discovered the trading technique in 2009.

“I’ve been banging my head against a particular trading strategy since 2009, and at some point you just want to win and move on in some way,” he said

“This class of HFT trading is predatory, it’s disruptive to markets, and it is actually unbeatable without regulatory change.”

Both the NASDAQ and the New York Stock Exchange declined to comment when contacted by CNBC.

Trader disclosure: On Sept. 20, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s “Fast Money” were owned by the “Fast Money” traders: Dennis Gartman is long AUD; Dennis Gartman is long CAD; Dennis Gartman is long GOLD; Dennis Gartman is short Euro; Dennis Gartman is short Yen; Dennis Gartman is short Crude Oil; Dennis Gartman is short SOY; Guy Adami is long C; Guy Adami is long GS; Guy Adami is long INTC; Guy Adami is long AGU; Guy Adami is long MSFT; Guy Adami is long NUE; Guy Adami is long BTU; Steve Weiss is long T; Steve Weiss is long VZ; Steve Weiss is long VOD; Steve Weiss is long AAPL; Steve Weiss is long TOT; Steve Weiss is long HK; Steve Weiss is long AIG; Steve Weiss is long BAC; Steve Weiss is long BBT; Steve Weiss is long QCOM; Steve Weiss is long MTGE; Steve Weiss is long CINY; Steve Weiss is long AMTG; Steve Weiss is long M; Steve Weiss is long EUO; Stephanie Link is long AAPL; Stephanie Link is long JPM; Stephanie Link is long WFC; Stephanie Link is long DD; Stephanie Link is long NKE.

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