Excerpt from Graham Bowley | Published October 8, 2011 | NYTIMES.COM
Regulators in the United States and overseas are cracking down on computerized 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 United States 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 in coming weeks.
In addition, officials in Europe, Canada and the United States 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 computerized 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 percent in the last hour, raising questions on what was really behind it.
In the United States, the Securities and Exchange Commission has been looking into the new market structure for almost two years. In July, it approved a “large trader” rule, requiring firms that do a lot of business, including high-speed traders, to offer more information about their activities in case regulators need to trace their trades.
After the flash crash, exchanges introduced circuit breakers to halt trading after violent moves. Bart Chilton, a commissioner at the Commodity Futures Trading Commission, called for regulators to go further. He wants compulsory registration of high-frequency firms and pre-trade testing of their algorithms.
One of the most controversial actions has been the European Commission’s recent proposal for a financial transaction tax on speculators, which would hit high-frequency firms and curtail volumes. The proposed tax would apply to all trades in stocks, bonds and derivatives, and may face stiff opposition from European governments. Many such firms are based in Britain or the Netherlands, and authorities fear a loss of business.
In Canada, a top regulator is proposing higher fees on the biggest players. Last year, the country put in place a monitoring system to track the 200 million to 250 million orders its exchanges receive daily — up from 70 million a year and a half ago.
And the S.E.C. last year proposed what would be an even more high-powered monitoring system called a consolidated audit trail that would gather data on trades in real time from all United States exchanges, and be a powerful tool in helping regulators piece together events in case of another flash crash.
The monitoring “will provide regulators a critical new tool to surveil the securities markets and pursue wrongdoers, in a much more efficient and effective way than we can today,” said David Shillman, associate director of the S.E.C.’s trading and markets unit.
A version of this article appeared in print on October 9, 2011, on page A1 of the New York edition with the headline: Clamping Down On Rapid Trades In Stock Market.
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