We've discussed some of these issues before, and I think this "60 Minutes" story covers it pretty well. One difference here is it's not the typical Wall St. story of Madoff-like wolves swindling us clueless Muppets. Now the mega fund managers and i-banks are getting fleeced just like the small-time retail investor. But it's a death of a thousand cuts; tiny skims on the margins (adding up to billions in profits) that may have never been detected if it's wasn't for a diligent trader at RBC (Brad Katsuyama).
Maybe the big fish are especially concerned here because of the potential volatility that high-frequency traders could be introducing into the markets. That is why Goldman, Schwab, and others have endorsed and/or started to trade on Katsuyama's new IEX - an alternative equities exchange build with technological safeguards to prevent HFT skimming/front-running.
Most retirement savings, such as private pension funds or 401(k) and individual retirement accounts in the US, are invested in mutual funds, the most popular of which are index funds which must periodically "rebalance" or adjust their portfolio to match the new prices and market capitalization of the underlying securities in the stock or other index that they track.[31][32] This allows trading algorithms to anticipate and trade ahead of stock price movements caused by mutual fund rebalancing, making a profit on advance knowledge of the large institutional block orders.[18][33] This results in profits transferred from investors to algorithmic traders, estimated to be at least 21 to 28 basis points annually for S&P 500 index funds, and at least 38 to 77 basis points per year for Russell 2000 funds.[19] John Montgomery of Bridgeway Capital Management says that the resulting "poor investor returns" from trading ahead of mutual funds is "the elephant in the room" that "shockingly, people are not talking about."[20]
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