Tuesday, October 2, 2012

U.S. Leads in High-Frequency Trading, Trails in Rules

Given the missteps that have prolonged and deepened the European debt crisis, one wouldn’t necessarily expect the continent to be home to far-sighted financial reform. But that is exactly what seems to be happening in the realm of high-frequency, computer-driven trading.
High-speed trading comes with real benefits: lower trading expenses, better prices for investors and increased market liquidity. The costs, however, are fairly significant and can be seen in wild volatility and destabilizing trading snafus.
The U.S. Securities and Exchange Commission, stung by criticism that it lacks the knowledge to analyze the computerized trading that has come to dominate American stock markets, is planning to catch up.
Initiatives to increase the breadth of data received from exchanges and to record orders from origination to execution are at the center of the effort. Gregg Berman, who holds a doctorate in physics from Princeton University, will head the commission’s planned office of analytics and research.
High frequency trading, which some consider the root of all evil in today’s markets, may be on the verge of new regulations that could help avert future catastrophe. The problem is the potential new rules may not solve all of the market’s problems.
At least that’s what Larry Tabb, founder and CEO of the research firm Tabb Group, concludes in prepared commentary ahead of today’s roundtable discussion between the Securities and Exchange Commission and several companies within the industry. High frequency trading is often characterized as the use of supercomputers by sophisticated trading outfits to jump rapidly in and out of markets.