NEW YORK (Reuters) – Adopting new, U.S. market-wide circuit breakers to halt precipitous drops in individual stocks is “a done deal,” a source said on Tuesday, five days after a severe market plunge rattled investors and perplexed regulators.

Okay, folks the quote reads well and promises a lot, but since we have no details, I will consider it a start, and nothing more.

What I want to see is specific legislation or exchange rules that either ban or severely limit high-frequency trading, because that is the issue. The problem is not just individual stocks that get hit, although, as we saw last week, targeting individuals stock is a serious issue when a $30 stock drops to a nickel, or rises to $100,000 just like that!

No, the larger issue is the practice itself because it feeds panic in a troubled market. It exacerbates and exaggerates whatever the current issue is for that time. It can take a shaky market and turn it into collapsing market, all because tens of thousands of trades are firing in milliseconds. The ability to collapse a market, or worse, collapse the broad market in a moment is frightening, and it produces a lack of confidence.

Ultimately, it is the lack of confidence that is the greatest derivative problem (no pun intended)  of high-frequency trading, so, as long as the practice itself is not limited or banned, we traders  and investors will always have in the back of our minds the possibility of sudden and relentless drops in market value.

As it turns out, bad things often provide the catalyst for change. Sadly, we often have to experience the pain before we decide enough is enough. In the recent example of this problem,  we dodged a bullet, but who is to say that tomorrow, or the next day, or next week when some big-house traders push the start button on their computer we don’t have a repeat of the September through October 2008 debacle. If you recall those roller-coaster days, the markets were dropping and rising like a yo-yo, and that, my friends, is what can and will happen again if the SEC or Congress does not harness or eliminate the practice of high-frequency trading.

Trade in the day; invest in your life …                                                                            

Trader Ed