Clamping Down on Rapid Trades in Stock Market

GRAHAM BOWLEY

The New York Times

October 9, 2011 ET

Reg­ulators in the United States and over­seas are cracking down on com­pu­t­erized high-speed trading that crowds today’s stock exchanges, worried that as it spreads around the globe it is making mar­ket swings worse.
The cost of these high-frequency traders, crit­ics say, is the confidence of or­dinary investors in the mar­kets, and ul­ti­mately their be­lief in the fairness of the financial system.
“There is some­thing unholy about them,” said Guy P. Wys­er-Prat­te, a prom­inent longtime Wall Street trad­er and investor. “That is what caused this tremendous volatility. They make a fortune where­as the public gets so whipsawed by this trading.”
            

Reg­ulators are playing catch-up. In the United States and Eu­rope, they have re­cently fined traders for us­ing com­put­ers to gain advantage over slower investors by il­legally ma­nip­u­lating prices, and they suspect oth­er mar­ket abuse could be go­ing on. Reg­ulators are also weigh­ing new rules for high-speed trading, with an international reg­ulatory body to make rec­ommendations in com­ing weeks.
In addition, of­ficials in Eu­rope, Canada and the United States are consid­ering impos­ing fees aimed at lim­iting trading vol­ume or paying for the cost of greater over­sight.
Perhaps reg­ulators’ biggest worry is over the un­known dynam­ics of the com­pu­t­erized stock mar­ket world that the firms are part of — and the risk that at any mo­ment it could spin out of con­trol. Some reg­ulators fear that the sudden       

mar­ket dive on May 6, 2010, when prices dropped by 700 points in minutes and recovered just as abruptly, was a warning of the po­tential prob­lems to come. Just last week, the broad­er mar­ket fell through­out Tuesday’s ses­sion before shooting up 4 per­cent in the last hour, rais­ing questions on what was re­ally behind it.

“The flash crash was a wake-up call for the mar­ket,” said Andrew Haldane, exec­utive di­rector of the Bank of Eng­land responsible for financial stability. “There are many questions begging.”
The indus­try and oth­ers say that the vast major­ity of trading is le­git­i­mate and that its pres­ence means many extra buyers and sell­ers in the mar­kets, dras­tically reduc­ing trading costs for or­dinary investors.
            

James Overdahl, an advis­er to the firms’ trade group, said that they fa­vor polic­ing the mar­ket to stamp out ma­nip­u­lation and that they support efforts to improve mar­ket stability. The traders, he said, “are as much inter­ested in improving the quality of mar­kets as anyone else.”
Some aca­dem­ic stud­ies show that high-frequency trading tends to reduce price volatility on normal trading days.
And while a re­cent anal­ysis by The New York Times of price changes in the Standard & Poor’s 500-stock index over the past five decades showed that big price swings are more common than they used to be, an­a­lysts as­cribe this to a va­ri­ety of causes — including high-speed electron­ic trading but also high anxiety about the Eu­ropean cri­sis and the