As you all know, one of my concerns about trading the market is high-frequency trading. My contention is that those who use algorithmic software for trading have an unfair advantage trading individual markets and they have the ability to negatively impact the overall market, as we witnessed in the fall of 2008, and with the “Flash Crash” earlier this year. I have argued that Congress, or its administrative arm the SEC, should get on the stick and regulate high-frequency trading. Some efforts were made immediately after the Flash Crash. The SEC now requires the exchanges to implement the circuit breaker rules in place, whereas before the Flash Crash, implementing those rules was voluntary. As we saw then, and as we see every day, voluntarily implementing rules does not work. In fact, it is an oxymoron. Rules are rules, not suggestions. Anyway, Congress is still working on the issue, as seen in the excerpt below.
A senior Democratic senator said some high-frequency traders should be legally bound to provide liquidity to U.S. stock markets as part of efforts to prevent a repeat of the May 6 “flash crash.” Sen. Charles Schumer (D., N.Y.) called on regulators Wednesday to clarify the role of the market-making firms that are supposed to maintain liquidity. He also proposed new rules aimed at ensuring they don’t exit when trading becomes volatile. “Requiring more high-frequency traders to be legally obligated to step in and provide liquidity would go a long way in helping to avoid sudden, rapid price plunges …
This is good news, but it is not enough just to talk about this problem. Action needs to happen, and it needs to happen quickly for many reasons, but the one reason of immediate import, the one reason that impacts all of us every day, is the Flash Crash scared tens of billions of dollars of liquidity out of the market. Many thoughtful folks are arguing that the “Retail Investor,” has yet to return to the market because of the high-frequency trading problem. Certainly, liquidity in the market has dropped substantially since May 6th.
Some will argue that my concerns (as well as others) are overblown, that high-frequency trading has been around for awhile and associated problems are minimal. Sure every now and then … My response is: how bad does it have to get before everyone gets it? Consider the excerpt below, please.
Philip Vasan, who heads the Credit Suisse prime-brokerage unit catering to hedge funds, began hearing from fund managers who were ratcheting back on trading because, they told him, stocks were behaving strangely. The funds were acting like “a dog that growls before an earthquake,” Mr. Vasan told several clients. In the days leading up to the May 6 “flash crash,” some stock-market veterans were picking up disturbing rumblings. When the quake hit on the afternoon of May 6, the Dow Jones Industrial Average suffered its biggest, fastest decline ever, and hundreds of stocks momentarily lost nearly all their value. So many things went wrong, so quickly, that regulators haven’t yet pieced together precisely what happened.
Think about it.
Trade in the day; invest in your life …
