The truth of high frequency trading HFT could spark 1987 style Black Market crash? Where is the SEC to protect us?

(Last Updated On: November 2, 2010)

The truth of high frequency trading HFT could spark 1987 style Black Market crash? Where is the SEC to protect us?

Here is an interesting article with some highlights:

After all, if a computer code is valuable enough for someone to steal, and critical enough for a Wall Street firm to go to federal authorities to protect, one would think that regulators would want to know why it is so important.

Yet regulators largely have stood by and allowed this secretive corner of the quantitative trading world to grow ever bigger, without mustering up much of a protest.

Computer-driven trading, where complex buy and sell orders are completed in fractions of a second, now account for 73 percent of all daily stock trades in the United States, according to the Tabb Group, a financial services research firm. Tabb also estimates that the 300 securities firms and hedge funds that specialize in rapid-fire algorithmic trading raked in some $21 billion in profits last year.

High frequency traders also earn lucrative “rebates” from stock exchanges by serving as de facto market makers for fast-moving stocks

The big fear is that with high frequency trading dominating daily trading activity, it could spark another 1987-style market crash. The doomsayers say that could occur if all these automated trading programs — which operate with almost no adult supervision — begin reacting to the same downward price trends in a stock or commodity. Or high frequency trading firms could worsen a sell-off by refusing to execute trades to protect their own capital, a move that would make it difficult for other investors to quickly exit a falling stock.

High frequency trading may have added to a still unexplained 69 percent plunge in shares of Dendreon on April 28. The Seattle-based drug company’s stock fell precipitously in less then two minutes before officials at the Nasdaq Stock Market were forced to halt trading.

“Right now, we rely on humans at the exchanges to pull the alarm, but in the nanosecond world that is too slow,” Angel says.


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