Wild swings in market causing loss of confidence in markets and prices
(NEW YORK) Regulators in the United States and overseas are cracking down on computerised high-speed trading that crowds today's stock exchanges, worried that as it spreads around the globe it is making market swings worse.
The cost of these high-frequency traders, critics say, is the confidence of ordinary investors in the markets and, ultimately, their belief in the fairness of the financial system.
'There is something unholy about them,' said Guy P Wyser-Pratte, a prominent longtime Wall Street trader and investor. 'That is what caused this tremendous volatility.
'They make a fortune whereas the public gets so whipsawed by this trading.' Regulators are playing catch-up. In the US and Europe, they have recently fined traders for using computers to gain advantage over slower investors by illegally manipulating prices, and they suspect other market abuse could be going on.
Regulators are also weighing new rules for high-speed trading, with an international regulatory body to make recommendations to global leaders in coming weeks.
In addition, officials in Europe, Canada and the U S are considering imposing fees aimed at limiting trading volume or paying for the cost of greater oversight.
Perhaps regulators' biggest worry is over the unknown dynamics of the computerised stock market world that the firms are part of - and the risk that at any moment it could spin out of control. Some regulators fear that the sudden market dive on May 6, 2010, when prices dropped by 700 points in minutes and recovered just as abruptly, was a warning of the potential problems to come. Just last week, the broader market fell throughout Tuesday's session before shooting up 4 per cent in the last hour, raising questions on what was really behind it.
'The flash crash was a wake-up call for the market,' said Andrew Haldane, the executive director of the Bank of England responsible for financial stability. 'There are many questions begging.' The industry and others say that the vast majority of trading is legitimate and that its presence means many extra buyers and sellers in the markets, drastically reducing trading costs for ordinary investors.
James Overdahl, an adviser to the firms' trade group, said that they favour policing the market to stamp out manipulation and that they support efforts to improve market stability. The traders, he said, 'are as much interested in improving the quality of markets as anyone else.'
High-frequency trading took off in the middle of the last decade when regulatory reforms encouraged exchanges to switch from floor-based trading to electronic. As computers took over, daily turnover of stocks rose to 8 billion shares in the US from about 6 billion in 2007, according to BATS Global Markets.
The trading, done by independent firms or on special desks inside big Wall Street banks, now accounts for two of every three stock market trades in America.
Even the traders' authorised activities are coming under fire, especially their tendency to shoot off thousands of buy or sell orders a second and suddenly cancel many. Long-term investors like pension funds complain that the practice makes their trading harder.
Global regulators are considering penalising traders if they issue but then cancel a high degree of orders, or even making themÃ‚ keep open their orders for a minimum time before they can cancel.Ã‚ Long-term investors worry that some traders may be using their superior technology to detect when others are buying and selling and rush in ahead of them to take advantage of price moves. This is driving some investors who buy and sell in large blocks to move to new so-called dark pools - venues away from public exchanges. As more trading takes place in these venues, prices on exchanges have less meaning, critics say.
Extract from The Business Times 10 Oct 2011