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Countries around the world are slowly but surely rethinking the rules of high frequency trading. Where once they rushed to catch up to the United States, now they’re taking steps back, the NYT reports.To review: High frequency trading is based on computer algorithms, designed by PhDs and used by the most sophisticated investors in the world. Trades fire off at speeds in the millionth of a second.
Critics of the practice say that moving at such speeds can cause volatility in the markets, like flash crashes (a 2010 flash crash brought the stock market down 9%). They also say that when a program is faulty, it’s harder to stop high speed trades from doing serious damage — like when a mistake in a Knight Capital trading program lost the company $440 million this summer.
Events like those are giving countries around the world pause. They don’t necessarily want to get rid of HFT, they just want to put regulations in place that will control it (if that’s even possible). Here’s what they’re doing:
- In Germany/EU — legislation that would force HFT firms to register with the government is on the move.
- In Australia — Regulators want to submit HFT firms to more supervision and force them to do stress tests.
- In Canada — Regulators are increasing fees to firms that flood the market with orders and limiting the number of trades that can go into dark pools, where big players can trade without revealing their positions. Plus, traders will only allowed to go in to dark pools if the prices are better than those are the open market.
Of course, all this regulation could backfire (from the NYT):
Kay Swinburne, one of six members of the (EU) committee that drew up the rules, said that there was “a general feeling that the U.S. markets are still learning from their mistakes.” The committee’s draft was approved Wednesday, but it still faces a long process before coming into law. But Ms. Swinburne, a former banker, said she worries that her fellow committee members may go too far and end up choking off trading, making buying and selling stocks more expensive for more traditional investors.
Meanwhile, here in the U.S., the SEC is holding a day-long roundtable on HFT on Tuesday and, according the WSJ, regulators have recently asked major broke-dealers for more information on the internal controls that make their algorithms and systems work.
Basically, they want to know how a trade gone-bad can be stopped. It should be noted, though, that SEC regulation does not require firms to test their programs before they go to market — it’s merely suggested.
All of this comes after critics of HFT made their own suggestions on the Hill during a Senate hearing on the matter last week. One of their suggestions was installing “kill switches” that would stop a program dead in its tracks.
But according to Jeff Connaughton, a former lobbyist and author of ‘The Payoff: Why Wall Street Always wins, don’t expect much to come out of anything the SEC, FINRA and Congress do.
Why? The Blob, that’s why. The Blob is the revolving door of bureaucrats, government entities and lobbyists that regulate our financial system, from The Treasury to the Banking Committee. They all hang together.
Connaughton told Business Insider that actions by foreign regulators are “Prima facie evidence that The Blob is stronger in the U.S,”
So we’ll just have to see how this goes.
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