The following is an excerpt from JIM MCTAGUE | August 11, 2012 | Barrons.com |
Markets have been jarred by four major computer mishaps this year, including the recent one at Knight Capital. It’s time to rein in the Street’s speed demons: trading bots.
Wall Street is no autobahn. Traders pushing pedal to the metal risk hurtling into the Buttonwood Trees.
Knight Capital’s $440 million computer-generated smash-up this month is the latest sign that the world’s most important financial superhighway, where trades take place in less than the blink of an eye, sorely needs a speed limit.
Michael Goldstein, a professor of applied investments at Babson College and a noted advisor on market regulators, suggests slowing traffic to 10 milliseconds—a millisecond is 1/1,000th of a second—the limit in 2007. Today, trades zip by in a fraction of a millisecond, depending on the distance between the robot and the data centers of the nation’s 15 stock exchanges and 40 or so “dark pools”—electronic trading venues designed to handle large institutional orders. Traders hooked on the advantages of speed might grumble; but Goldstein doubts that they would abandon Wall Street for some market abroad. It takes about 17 milliseconds to send a trade from New York to London and even more time to Asian markets like Singapore.
EVEN A SPEED LIMIT OF five milliseconds could reduce the pileups on Wall Street, Goldstein contends. To high-speed-trading robots, a few milliseconds is an eternity—providing plenty of time for machine and operator to spot and rectify errors they might not notice when data are flowing at lightning speed.
Changes in regulations by the Securities and Exchange Commission at the beginning of this century that tried to increase competition among exchanges and bring down customers’ costs emphasized speed in the execution of orders. Prior to that, exchanges like Nasdaq would slow down trades from the East Coast so that those from the West Coast could catch up. Exchange officials felt it unfair to give New Yorkers an advantage based solely on geography. But when the SEC allowed other exchanges to trade stocks listed on Nasdaq or the NYSE, the faster traders got the best executions.
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