Best of the Week
Most Popular
1.Stocks Bear Market Apocalypse Imminent Crash Gets Nuked Again - Nadeem_Walayat
2.Gold And Silver – A Reality Check - Michael_Noonan
3.The Killer Ape, Human Evolution, Artificial Intelligence and Extinction End Game - Nadeem_Walayat
4.Stock Market S&P 500 Volatility-Based Price Probability Range - Richard_Shaw
5.A Stocks Bear Market Is Now More Likely Than Not - Richard_Shaw
6.Money Supply and the Fed’s Serious Inflation Risks - Zeal_LLC
7.More Selling for Stock Market, Gold? - Brad_Gudgeon
8.Gold, Silver Precious Metals: a Critical Week Ahead - Rambus_Chartology
9.Gold Price Change in Character - Gary_Savage
10.Advice for Biotech Investors: 'Hold Your Powder' 'til Winter - TLSReport
Last 5 days
Why Millennials Are So Different - 13th Oct 15
Unhealthy, Not Wealthy, and Far from Wise, The Changing Healthcare World - 13th Oct 15
Which Is The Better Investment - Gold Or The Dow? - 13th Oct 15
Stock Market Initial Projection Reached (Short-Term Top Expected) - 13th Oct 15
Gold Signals The End Of This Monetary Era - 13th Oct 15
Gold for Stocks Bear Market? - 13th Oct 15
The Mindless Stupidity of Negative Interest Rates - 13th Oct 15
China, The Great Depressions 1 & 2, and Gold - 13th Oct 15
Top 3 Technical Tools Part 3: MACD - Video Lesson - 13th Oct 15
An Introduction to Technofeudalism Ascending - 13th Oct 15
Stock Market S&P 500: Is it This Simple? - 12th Oct 15
Chanos: I'm a Potential Purchases or Glencore Stock - 12th Oct 15
IMF Fears $3 Trillion Credit Crunch; Lagarde Warns 'IMF Credibility at Stake' - 12th Oct 15
Structural Reasons For A Long-Term Financial Markets Decline - 12th Oct 15
New Hedge Fund Buying Enters Crude Oil Market - 12th Oct 15
Stock Market / GDX New Lows Coming: Panic Ahead? - 12th Oct 15
Stock Market Gains, but the “Super Crash” Is Accelerating - 11th Oct 15
October Stocks Bear Market and Crash Killer - 11th Oct 15
A Bifurcated U.S. Housing Market, How Much Longer Can Unaffordable Housing Prices Last? - 10th Oct 15
Stock Market Primary V to New Highs Underway - 10th Oct 15
Putin’s “Endgame” in Syria - 10th Oct 15
Gold And Silver Trapped In A Low-End Trading Range - 10th Oct 15
Free Traders Educational Week - 10th Oct 15
Stock Market Rally May be Broken - 9th Oct 15
Gold Stocks Major Breakout - 9th Oct 15
Contrarian Investing - Being the 10th Man - 9th Oct 15
U.S. Can Expect Recession in 1-3 Years - 9th Oct 15
The Greater Economic Depression Deep State - 9th Oct 15
Financial Markets Calm Before the Storm? - 9th Oct 15
Stock Market History Calling, Says Performance will be Crappy for Another ~10 years! - 9th Oct 15
Why This Feels Like an Economic Depression for Most People - 9th Oct 15
Dr Copper Back from the Dead - Time to Buy or Blink - 8th Oct 15
Glencore Rout Blamed on Short Sellers Playing With CDS - 8th Oct 15
The Real Reason for the Refugee Crisis You Won’t Hear About in the Media - 8th Oct 15
US Stocks: The [Trend]Line Between Bull and Bear Market - 8th Oct 15
Bundesbank “Reassures” Re. Gold Bullion Reserves as Deutsche Bank Shocks With €6 Billion Loss Warning - 8th Oct 15
How Our Aversion To Change Leads Us Into Danger - 8th Oct 15
Moving Stem Cell Research Forward: Bernie Siegel of the Genetics Policy Institute - 8th Oct 15
Stock Market VERY IMPORTANT Turn Date - 7th Oct 15
The 5th Convergence…An Economic & Financial Superstorm That Will Devastate America - 7th Oct 15
Summers Grades Janet Yellen's Fed Performance 'Incomplete' - 7th Oct 15
Gold Versus Central Banks Paper Ponzi - 7th Oct 15
QE3 is Over Get Ready for QE4 - 7th Oct 15
How to Profit from Government Mandates in Biofuels - 7th Oct 15
A Key Oil Price Trend That Everyone Is Missing - 6th Oct 15
Stock Market Turn Appears to Have Been Made - 6th Oct 15
Designing a Dividend Growth Portfolio for a Specific Retirement Yield Objective - 6th Oct 15
Peter Schiff Predicts Gold Price Breakout - Video - 6th Oct 15
Theresa May Declares War on Immigration - Conference Speech Full Transcript - 6th Oct 15
Is Russia Plotting To Bring Down OPEC? - 6th Oct 15
Target Date Funds As Aid In Retirement Investment Portfolio Design - 6th Oct 15
Stocks Bear Market Apocalypse Imminent Crash Gets Nuked Again - 6th Oct 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

High-Frequency Trading Could Cause Another Flash Stock Market Crash

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

By: Money_Morning


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."


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:

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

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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

Biggest Debt Bomb in History