Best of the Week
Most Popular
1.US Dollar Crashes, Gold And Bitcoin Skyrocket As Economic Recovery Lie Is Exposed - Jeff_Berwick
2.Now Obama Warns Americans to ‘Be Prepared’ for Disaster… What Does He Know? - Jeff_Berwick
3.EU Referendum - Britain's Immigration / Migrant Crisis Explained - Nadeem_Walayat
4.EU Referendum - British People vs Establishment Elite, Vote LEAVE an Act of Defiance! - Nadeem_Walayat
5.Prominent Billionaire Investors Warn of Financial Crash, Quietly Position Themselves - MoneyMetals
6.Bankers Warn of BrExit Financial Armageddon if British People Vote for Freedom - Nadeem_Walayat
7.Bad U.S. Jobs Report Prompts Stocks Bear Market Rally Towards New All Time Highs! - Nadeem_Walayat
8.Gold And Silver – Friday May Have Marked A Pivotal Turnaround - Michael_Noonan
9.EU Referendum - British People vs Establishment Elite, the Illusion of Democracy and Freedom - Nadeem_Walayat
10.Felix Zulauf: Monetary Stimulation Creates Bubbles, Not Prosperity Nor Growth - GoldandLiberty
Free Silver
Last 7 days
First the UK, then Scotland ... then Texas? - 26th June 16
Stocks Bear Market Resumes or Just More Noise - 26th June 16
Gold And Silver: Security, And BREXIT - 25th June 16
Dow, Euro & Brexit Recap - 25th June 16
Resistance Holding Gold Stocks after Brexit - 25th June 16
Venezuela vs. Ecuador (Chavismo vs. Chavismo Dollarized) - 25th June 16
Gold, Silver And PM Stocks Summer Doldrums Risk - 24th June 16
Here’s Why China “Economic Hard-Landing” Worries Are Overblown - 24th June 16
Jubilee Jolt: Markets Crash, Gold Skyrockets as Britain Takes Brexit - 24th June 16
BrExit Morning - New Dawn for Britain, Independence Day! - 24th June 16
LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - 24th June 16
Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - 24th June 16
EU Referendum Shock Results Putting BrExit LEAVE in the Lead Hitting Sterling Hard - 24th June 16
Final Opinion Poll Gives REMAIN 52% Lead, Bookmakers, Markets and Pollsters ALL Back REMAIN Win - 23rd June 16
Does BREXIT Matter? Outlook for Sterling - 23rd June 16
Keep Calm and Vote BrExit - Last Chance to Break Free of EU Superstate - 23rd June 16
Here’s the Foreign Policy Trump and Clinton Really Want - 23rd June 16
Details Behind Semiconductor Stocks Leadership - 23rd June 16
Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - 23rd June 16
BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - 22nd June 16
Proof that the Gold Bears are Wrong - 22nd June 16
Here’s a Trillion-Dollar Investment Opportunity for Those Few with No Debt - 22nd June 16
BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - 22nd June 16
Increase In U.S. Rig Count Will Not Cap Oil Prices - 22nd June 16
Are Copper and China Stocks Set to Rally? - 22nd June 16
SPX May Break Its Trendline - 22nd June 16
Believe it or Not: More Kids Live At Home Now than Since The Great Depression - 21st June 16
EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - 21st June 16
British Pound Outlook - BREXIT, Europe and You - Does your vote matter? - 21st June 16
Fascist Victory Behind the European Union - 21st June 16
EU Referendum Opinion Polls Analysis Shows Strong Momentum in REMAINs Favour - 21st June 16
Is It Time to Dump Gold and Buy Platinum? - 21st June 16
Could Central Bankers Be Gold and Silver's BIGGEST Allies? - 20th June 16
Words Still Mean Things – Brexit With Graham Mehl - 20th June 16
Baroness Warsi the Manchurian Candidate Quits LEAVE for REMAIN, Boris Johnson Next? - 20th June 16
FTSE Soars, Stock Markets Bounce on LEAVE Polls Surge, Bookmakers Widen BrExit Odds - 20th June 16
Brexit Would Trigger Devolution of Europe - 20th June 16
Stock Market Week Of Uncertainty - 20th June 16
Will Gold’s Bullish Price Chart Outperform Gold’s 5 Bearish Indicators? - 20th June 16
Bonds And Stocks At All-Time Highs: Are Markets Confused Or Broken? - 20th June 16
Silver Sleeping On the Job - 19th June 16
BrExit Odds Sink, REMAIN Polls Boost by Jo Cox Killing by Radical Right Extremist, Conspiracy? - 19th June 16
How Elliott Waves Tell You When to "Jump In" & When to "Jump Out" of Markets - 18th June 16
Stock Market Inflection Point During Bifurcation - 18th June 16
Gold And Silver – Insanity Is World “Norm.” Keep Stacking! - 18th June 16
Gold Stocks - Bull Markets that Follow Epic Bears - 18th June 16
The Fed Giveth and the Gold Bullion Banks Taketh Away… - 17th June 16
Brexit: "The Vote Heard Around the World" - 17th June 16
Gold Stocks Summer Breakout? - 17th June 16
Stock Investors Get Higher Returns and More Dividend Income - In Less Time With Less Risk - 17th June 16
How to Use the Gold-to-Silver Ratio? - 17th June 16
Inflation, Deflation & Associated Trading Prospects - 17th June 16
Overnight Markets Struggling to Stay Flat - 17th June 16
Gold Price Surges to Highest in Nearly Two Years On Central Bank and Brexit Haven Demand - 17th June 16
Stock Market Thinking Upside Down; Dow 18k Still Key - 17th June 16
Jo Cox MP Terror Attack Killing Claimed for "Britain First" - Witness Report - 17th June 16
Stock Market, Iron Ore, Bitcoin – Is Silver Next for Chinese Momentum Investors? - 16th June 16
EU Referendum Campaigning Suspended Following Shooting of MP Jo Cox, Suspect Named as Tommy Mair - 16th June 16
Why People are Migrating to the UK, Illegal Immigration, Housing Crisis Consequences - 16th June 16
Stocks Fluctuate Following Recent Decline - Bottom Or Just Pause Before Another Leg Down? - 16th June 16
The US Consumer-Driven Economy Has Hit a Brick Wall - 16th June 16
Bitcoin Price Going Parabolic Again, Now At $730 and Up 60%+ In Last Three Weeks - 16th June 16
China's Hard Landing Has Already Begun! - 16th June 16
Crude Oil Price - Oil Bears vs. Support Zone - 16th June 16
Central Bankers Are Wrong About Inflation and Deflation - 15th June 16
Alignment Of The Dow, Interest Rates, Debt and Silver Cycles Will Deliver A Fatal Blow - 15th June 16
Stock Market Bounce May be Over - 15th June 16
EU Referendum: Have the Bookmakers Got it Wrong? LEAVE Opinion Polls Lead - 15th June 16
Gold Price Rally - 15th June 16
How to Invest for Brexit Report - 15th June 16
Stock Market Short of the Decade? - 15th June 16
Stock Market Sell Off Coming! - 14th June 16
QE - The Good, Bad & Ugly - 14th June 16
This Demographic Shift Makes Our Social Security Useless - 14th June 16
Gold Stocks Ultimate Objective in a World of Monetary Transition - 14th June 16
Philosophy of the New World Order - 14th June 16
The Brexit Game - Boris Johnson vs David Cameron EU Referendum Zombies - 14th June 16
EU Referendum: LEAVE Opinion Poll Lead of 51% to 49% Whilst Bookmaker Odds Still Strongly Favour REMAIN - 14th June 16
George Soros Making Big Bets on Gold - 14th June 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

High-Frequency Trading Could Cause Another Flash Stock Market Crash

Stock-Markets / Financial Crash Feb 01, 2012 - 08:01 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleDavid Zeiler writes: The threat of another flash crash caused by high-frequency trading is as great as ever.

And the next flash crash could be much worse than the one that shocked investors in May 2010.

Although the Securities and Exchange Commission (SEC) has taken some steps to prevent another flash crash caused by high-frequency trading (HFT), some experts question whether the additional disclosure and "circuit-breakers" designed to prevent big, sudden price moves will make a difference.


"Those things won't prevent another flash crash - they can't," said Money Morning Capital Waves Strategist Shah Gilani. "All they will do is soften the move."

The real issue, Gilani said, lies with the computers that execute the trades - thousands of them in milliseconds.

HFT has changed the nature of the stock market since these trades now account for between 60% and 70% of the transactions on the U.S. stock exchanges.

"You can't stop a flash crash unless you stop the computers from doing what they're programmed to do. And that's not being addressed," Gilani said. "The SEC is looking at keeping the ship from sinking, not stopping it from hitting icebergs."

HFT's heavy volume and high speed made it the prime suspect in the flash crash of 2010, when the Dow Jones Industrial Average plunged more than 600 points in five minutes, before recovering almost as quickly.

Mini Flash Crashes
Since then, the frequent occurrence of mini flash crashes - when a single stock or exchange-traded fund experiences a steep and rapid drop in price that quickly reverses - have served as nagging reminders of the vulnerability of the system to such events.

"It's like seeing cracks in a dam," James J. Angel, professor at the McDonough School of Business atGeorgetown University told The New York Times. "One day, I don't know when, there will be another earthquake."

Studies of HFT and the 2010 flash crash have supported the idea that the markets are still vulnerable.

A study commissioned by Barron's applied the new SEC circuit-breaker rules to trading data from the 2008-2010 period with troubling results.

Had the current trading limits been in place during the 2010 flash crash, only 14% of stocks in the Russell 1000 would have been affected.

Although not proof the circuit-breaker rules would fail, the study did show the need for more back testing of the new rules.

"While I understand the pressure to "do something' in the wake of the flash crash, it is disconcerting that no one has done this sort of back testing in advance of policy decisions," Casey King told Barron's. King, director of the Yale School of Public Health's Center for Analytical Sciences and a former Salomon Brothers employee, conducted the study.

A second study, conducted by the U.K. Department for Business, Innovation, and Skills, concluded that the computerized complexity that made the flash crash possible in 2010 make it just as likely to happen again.

And the next time could be worse.

"The true nightmare scenario would have been if the crash's 600-point down-spike, the trillion-dollar write-off, had occurred immediately before the market close," the U.K study notes. "The only reason that this sequence of events was not triggered was down to mere lucky timing the world's financial system dodged a bullet."

High-Frequency Trading Vampires
Adding to the concern is that only 2% of the 20,000 brokerages account for all that high-frequency trading, and they bet big money doing it. In 2008 alone, Citadel Investment made $1 billion in profits from its HFT operations.

HFT critics claim these firms simply suck money out of the market.

Many HFT transactions are made solely to "sniff out" the market for demand and are withdrawn as quickly as they are initiated. That's what gives many HFT firms their lucrative edge.

In fact, as many as 95% of HFT trades are cancelled, undermining the argument that HFT adds liquidity to the market.

Experts say the SEC needs to go much further to have any hope of eliminating the threats that high-frequency trading poses.

Gilani suggested the SEC implement filters in the HFT traffic to the exchanges that would slow down opening transactions but not closing transactions. That would help "close the loop that remains open in fast-moving markets when new positions are entered, sometimes to knock down prices to facilitate the vacuum that results in bids evaporating and prices collapsing."

Money Morning Global Investing Strategist Martin Hutchinson offered two other solutions.

First, the SEC could introduce a rule that all orders must be exposed for a full second. That will reduce the volume of high-frequency trading, but still wouldn't truly protect non-computerized outsiders.

The second idea would be to introduce a small "Tobin tax" on all share transactions. It could be tiny; maybe 0.01%. (The SEC would also need to ban "exchange rebates" to traders).

"Such a tax would make the worst HFT types unprofitable, without imposing significant costs on retail investors," Hutchinson said. "It's about time the governmentimposed some taxes to stop the worst of these scams and recover the public some of its money."

But until the SEC implements stricter measures, high-frequency trading will keep the markets susceptible to trading excesses as well as another flash crash.

"We had a lot of change, we had a lot of money, we had no transparency, and it almost destroyed the financial system of the world," former Sen. Ted Kaufman, D-DE, an outspoken critic of HFT, told the Baltimore Sun. "I cannot stress enough how worried I am, how concerned I am about what's happening to our markets."

Source http://moneymorning.com/2012/02/01/high-frequency-trading-could-cause-another-flash-crash/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive



© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

sbulltrader
01 Feb 12, 15:39
Something doesn't make sense

The comment "In fact, as many as 95% of HFT trades are cancelled, undermining the argument that HFT adds liquidity to the market." makes no sense.

First of all, 95% of ORDERS are cancelled, not trades. Secondly, the cancelled orders are almost always replaced by another order, so the actual liquidity provided by high frequency stays the same, just at different prices.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife