Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Ignore Yellen and Buy the Dip in Precious Metals - 27th Aug 16
SPX Downtrend Should be Underway - 27th Aug 16
Unraveling the Secular Economic Stagnation Story - 27th Aug 16
The Precious Metals Sector and the Fed. . . - 27th Aug 16
Stock Market - All Is Calm, All Is Not Right - 27th Aug 16
Gold Junior Stocks Q2 2016 Fundamentals - 26th Aug 16
Buy Gold’s August Dip? Gold’s Monthly Sweet Spot In September - 26th Aug 16
The IMF’s Internal Audit Reveals Its Incompetence and Massive Rule Breaking - 26th Aug 16
Commodities Are the Best Bargain Now—Here’s What to Buy - 26th Aug 16
Why I Left Canada and Became A Citizen of the Dominican Republic - 26th Aug 16
The GLD vs GOLD - 26th Aug 16
Can Stocks Survive Without Stimulus? - 25th Aug 16
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

How to Trade Elliott Waves

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