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The Perils of High-Speed Trading

17 may 2010 - News - Editor

While talk of a stock exchange generally brings to mind the vibrant organized chaos of dealers on the floor shouting buy and sell instructions - scoring spectacularly, or failing dismally, wiping out fortunes in a heart-beat - the reality of modern-day stock market trading is quite different. The majority of today's trading is carried out by state of the art technology, often being referred to as high-frequency trading, or high-speed trading – an apt description by any measure. On Thursday May 6, the Dow Jones Industrial Average experienced an intraday drop of close to 1,000 points, and although stock market regulators have not yet pinpointed the cause of the dramatic drop, it has been conceded that high-speed trading is likely to have contributed to the incident, but was unlikely to have been the sole cause. Critics of the constantly evolving manner of modern trade, however, point to this incident as being evidence of the risks linked to high-speed trading.

With systems that can conclude a trade in as little as sixteen microseconds, some analysts caution that automated high-speed trading has the potential to amok (like some B-Grade sci-fi movie) as various systems are put in place to cash in on markets that are already considered to be volatile and somewhat unstable. Brokerages and traders who earn a living off commissions on individual transactions are no doubt keen for trading to continue at this rate, as more transactions translate into more commission. But increasing trade volumes are not necessarily in the best interests of investors, or of the overall market.

Some issues raised by critics include the fact that programs for high-speed automated trading have not always been bug-free when introduced into the market. Moreover, human error can result in multiple transactions taking place before the error is realized and rectified. It appears that the May 6 'flash crash' may, in part, have been caused by automated trading bots not being capable of dealing with a trading time-out, and continuing regardless. While critics of new technology may be summarily dismissed as being archaic by those with 'vision', no-one can guarantee that markets are immune to the possibility of a technological malfunction that could bring the global financial market to its knees.

 


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