High-Speed Trading Back in the Spotlight
In days gone by, the floor of the New York Stock Exchange was crowded with market-makers and other specialists trading, creating a hive of activity and a buzz of excitement. Technology has replaced this scenario with computers, and as high-speed trading continues to move ahead, fortunes can be made or lost in the blink of an eye. While being fairly low profile in the public eye, Knight Capital Group is a major market-maker for the New York Stock Exchange and NASDAQ stocks, making extensive use of technology programmed to place buy or sell orders based on real-time market activity. Wednesday 1 August saw Knight Capital Group lose $440 million in the space of 30 minutes due to a technical glitch, once again bringing the pros and cons of high-speed trading into the spotlight and prompting a review of past problems caused by this hi-tech trend, such as the ‘flash crash’ of 2010 and the Facebook IPO debacle.
One of the selling points of proponents of high-speed trading was that corruptible humans prone to error would be replace by efficient computers offering speedier execution of transactions, transparent trading and lower fees – and once the ball started rolling, there was no stopping it. But, a series of dramatic ‘glitches’ has led some to question whether moving to hi-tech trading happened to quickly and whether it is, in fact, a better option.
In a recent study entitled The Dark Side of Trading Dr Ilia D Dichev of Emory University investigates the effect high trading volumes have on stock volatility. While noting that some high-frequency trading can be a good thing, with an estimated 70 percent of all trades in the market today being carried out this way, the input from investors who trade in the traditional manner – investigating the company they are considering investing in by studying financial statements, business plans, etc. – is negated.
Instead of relying on solid information to make investment decisions, many investors allow computer programs to make investment decisions for them – sometimes with disastrous results, as has been seen with technical glitches in the past five years or more. Some analysts have voiced their concern that high-speed trading has the potential of toppling global financial markets. The SEC is reportedly formulating new rules to prevent high-tech trading problems on Wall Street, among which may be the requirement for exchanges and other market platforms to carry out regular tests for software glitches and report test results to regulators.