High-frequency stock trade risky, unfair: experts

Sep 21, 2012 by Paul Handley

The increasing power of computerized high-frequency trades on US markets has been assailed in Congress as dangerous and unfair, as pressure builds to reel in the powerful industry.

Brokers and industry experts told a congressional panel Thursday that the flash crash of May 6, 2010, the that sabotaged 's IPO last May, and the Knight Capital that dealt the company a $440 million loss in August, were all examples of the potential for disaster from ultra high-speed, trading (HFY).

"US equity markets are in dire straits. We are truly in a crisis," said David Lauer, a former trader and currently a consultant on markets and high frequency trading at Better Markets Inc.

"While can often provide elegant solutions to intractable real-world problems, they can also spin out of control in unexpected ways," he told the on Banking.

High-frequency trading now accounts for 50-70 percent of the volume on markets each day. It has turned most share purchases into acts lasting a second or less, rather than investments that can span days, months and years.

But it simultaneously works in "dark pool" trading operations away from regulated markets, with computers able to work at hyper-speed to exploit price anomalies and take advantage of buyers and sellers trading in traditional ways.

Lauer cited the flash crash of May 2010, when in just minutes the market plunged, losing $1 trillion in value, then just as quickly recovered.

In the interim, though, he said, all in the market "simply disappeared" as computerized traders pulled out.

"Nobody had ever seen anything like it... When more than half of the liquidity in the stock market is able to be pulled from it in a matter of seconds, dramatically worsening an unstable situation, something is dreadfully wrong."

Lauer said the problem is far more common than the most publicized incidents suggest.

"'Mini flash crashes' occur on a near-daily basis in individual stocks," he said.

The effect is that traditional retail investors have pulled out, frightened by the volatility brought by HFT and the perception of unfair pricing.

"The flight of the retail investor during a period of incredible stock market returns is a sure sign that this exodus is a result of mistrust rather than economic conditions."

Andrew Brooks of brokerage T. Rowe Price told senators "the almost myopic quest for speed has threatened the very market itself."

"There is a growing distrust of the casino-like environment that the marketplace has developed over the past decade. We worry that the erosion of investor confidence can undermine our capital markets, which are so important to the economy."

He said the existence of 13 different exchanges and over 50 dark pools that large traders can use, and obtain faster information on prices than others, "has produced a market that values speed over fair access."

"In no other regulated industry is one party allowed a head start in exchange for payment."

Larry Tabb, chief executive of market consultant the Tabb group, said its poll of market professionals shows that the flash crash and Knight problem have driven confidence in the markets sharply lower.

But he cautioned against over-regulating.

"I am not sure that there is a direct correlation between this drop in confidence and the long-term trend of decreasing equity ownership," he told the Senate panel.

"We need to be careful not to over-regulate our markets. The unintended consequences may be tremendous. That said, liability and responsibility are important to the marketplace and should not be vacated."

Explore further: Why the Sony hack isn't big news in Japan

add to favorites email to friend print save as pdf

Related Stories

US imposes new rules on high-speed traders

Jul 26, 2011

US regulators on Tuesday announced new rules aimed at shedding light on the secretive industry of computerized high-speed trading, which has been blamed for destabilizing financial markets.

Wall Street's super traders come under fire

Sep 09, 2010

A handful of traders who master stock markets using ultra-fast computers may soon face a clampdown by US watchdogs as they try to prevent freak electronic glitches.

Metric predicts stock market 'flash' crashes

Dec 03, 2010

The May 6, 2010, stock market crash briefly erased almost $1 trillion in value and plunged the Dow Jones Industrial Average into its biggest intraday fall ever. The market recovered most of its losses within the hour, but ...

Knight Capital says it has $400M financing deal

Aug 06, 2012

(AP) — Knight Capital says investors have agreed to supply it with $400 million in financing, which would help the trading firm stay in business after last week's disastrous software glitch that shook U.S. stock trading and jeopard ...

Cost of glitch for Knight Capital: $440 million (Update 2)

Aug 02, 2012

(AP) — It's turning out to be one costly glitch. A technical problem that briefly threw dozens of stocks into chaos Wednesday will cost Knight Capital Group $440 million, the trading firm said Thursday. Knight's own ...

Study links ultrafast machine trading with risk of crash

Feb 19, 2012

(PhysOrg.com) -- In the United States, ultrafast trading in financial markets between 2006 and 2011 was the underlying factor for over 18,000 extreme price changes, according to a new study. Neil Johnson, ...

Recommended for you

Why the Sony hack isn't big news in Japan

15 hours ago

Japan's biggest newspaper, Yomiuri Shimbun, featured a story about Sony Corp. on its website Friday. It wasn't about hacking. It was about the company's struggling tablet business.

Sony faces 4th ex-employee lawsuit over hack

20 hours ago

A former director of technology for Sony Pictures Entertainment has sued the company over the data breach that resulted in the online posting of his private financial and personal information.

Sony tells AFP it still plans movie release

21 hours ago

Sony Pictures boss Michael Lynton denied Friday the Hollywood studio has "caved" by canceling the release of "The Interview," and said it still hoped to release the controversial film.

2012 movie massacre hung over 'Interview' decision

Dec 19, 2014

When a group claiming credit for the hacking of Sony Pictures Entertainment threated violence against theaters showing "The Interview" earlier this week, the fate of the movie's big-screen life was all but ...

Clooney slams skittish Hollywood after Sony hack

Dec 19, 2014

Film star George Clooney slammed the Hollywood movie industry for failing to stand up against the cyber threats that prompted Sony Pictures to cancel release of the movie "The Interview."

User comments : 0

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.