High-Speed Trading Back in the Spotlight

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.