No matter how sophisticated your technical trading strategy or in-depth your fundamental analysis data is, investing in Forex or stocks is, in essence, gambling. Only three outcomes are possible for a stock price or a forex pair: rise, fall or remain unchanged. Obviously, those of us who subscribe to fundamental analysis believe that an understanding of economic factors in the nations making up a currency pair will dictate if the pair rise or falls in value, but it remains impossible to know all of the economic (or human) factors which will drive a pair, so ultimately it is an informed gamble that’s being made. If you knew exactly how the markets would behave, you’d make a killing. Similarly, if you have inside knowledge about, say merger or acquisition plans, you could have an unfair advantage over everybody else which is why insider trading is a criminal offence.
No less a body than the Federal Bureau of Investigations in the USA will be taking a look at the high-speed trading industry to determine if their activities amount to unfair or even insider trading. High-speed trading systems use computers to make buy and sell orders against complex (and proprietary) software which can make purchases or sales on a millisecond timescale.
One of the questionable practices which will be investigated relates to firms placing large orders (buying or selling) for a given stock and then cancelling the order shortly afterwards. The sudden impulse in trading activity can cause the value of the stock to change and then the company can take advantage of the change that they have precipitated. Most people would think that such a practice was indeed fraudulent, stacking the odds in the favour of the high-speed trader and gypping investors trading traditionally.
The FBI, together with the Commodity Futures Trading Commission and the Securities e=Exchange Commission, will also look to see if the flow of data from exchanges to the servers of these high-speed trading systems could constitute insider dealing.
Automated, high-speed trading systems were blamed for the so-called “flash-crash” of May 2010 when US markets plummeted by 10% on the basis of erroneous automatic trades before safeguards ended trading.