High speed, high volume trading now accounts for over 60% of activity in the US stock market and that percentage is expected to increase in 2010. Is this good for the markets, as its proponents insist, or is the stage being set for a sudden, computer-driven market collapse that can happen too fast for human investors to respond?
The amount of high speed algorithmic trading is attracting a lot of attention and raising concern about fairness, legality, and threats to the market.
Small investors simply can’t compete with the computing power of hedge funds, institutional investors, and other high volume, automated traders. Their systems are programmed to find and instantly act on minuscule movements in trading activity: profits can be made whether a share price is going up or down.
Even NYSE has lost significant trading business to the brokers’ servers that are located on their premises, issuing automated buy/sell orders. To recapture the trading revenue, NYSE is finishing construction on a 400,000-square-foot data center in Mahwah, New Jersey that will be capable of handling a million messages a second, and every trade in every exchange worldwide.
Such a large influence in the market is viewed with concern by some economists who believe that automated trading by such a dominant sector has the potential for dramatic, high-speed crashes. For example, a tiny price change could trigger a stampede of stop-loss orders too fast for human intervention – and happening too fast for brokers to validate their clients’ margins.
Proponents defend high speed trading
Proponents of high frequency trading argue that everyone benefits. It creates liquidity and reduces market volatility. It is so efficient at matching sellers with willing buyers at specific prices, that the selling price (and broker fee) stays a bit lower. So do the overall spreads. Besides, they say, the main people to be hurt in the case of a sudden drop are the high-speed traders themselves.
But potential wounds may not all be self-inflicted. High speed automated trading is now so pervasive that most small investors are not aware that their own portfolios that are managed by institutional investors who use quantitative trading.
The SEC is concerned about fairness
The Securities and Exchange Commission recently proposed a rule, though it has not yet acted on it, to eliminate “flash orders.” Flash trading allows the buyer or seller to freeze an order placed on an exchange for a half-second, which is now plenty of time for high-speed computers to detect the pending market activity and make an automated response. Not only is this unfair to the individual investor, it smacks of illegal “front running.”
Congress offers a Transactions Tax bill
Congress, in an appeal to Main Street, is working on a bill to tax high-speed trades and deter high-volume speculators. Introduced by U.S. Sen. Tom Harkin ( D-Iowa), bill S.2927 would impose a $150-billion-a-year tax on securities transactions which would go toward job creation. The bill, now in the House for consideration, exempts mutual funds, pensions and retirement accounts, and annual trading activity under $100,000.
Expect a fight!
January 14th, 2010 at 3:03 pm
Senator harkin is 99% interested in taxing anything that thinks or moves. Such legislation is usually passed, forgotten about and the legislators move to the next idea to raise $$$ for the guv’ment.
Enforcement, updating, etc. is forgotten. The traders develop a new way to sidetrack the legislation and its increase in their cost of doing business.
July 6th, 2010 at 4:29 pm
Rules must be established prohibiting detection of other-people’s trades, stops, and limits.
When the automated system detects my limit order and my stops it gets an obvious advantage over me.
Also the pension plans are designed for long-term holdings and these robots have the potential to “transfer” the life savings of many into the investment accounts of a few by playing with items like volatility.