As Market Watch’s Jacob Bunge reported, a senior executive of CME Group Inc. cautioned regulators against constricting the business of high-frequency trading firms, warning that their absence could make financial markets less stable. Rather than crimping their activity in any response to last year’s “flash crash,” speed traders should be encouraged into more markets to make them more efficient and easier for investors to use, said Bryan Durkin, CME’s chief operating officer.
“The reality is that speed is going to continue to be a characteristic of our financial markets,” Durkin said in prepared remarks two week ago at an event hosted by Georgetown University. “Very careful consideration should be given to any decision to place restrictions on these speed traders that would be harmful to their participation and result in less efficient and less liquid markets,” he said.
High-frequency trading firms typically use their own capital to rapidly trade in and out of stocks, options and futures with the goal of profiting on small shifts in prices. They have been credited with making markets cheaper to trade in by contributing liquidity for other investors, and are the busiest clientele of exchanges, but the secrecy around their strategies and speed of operation have drawn concerns. Regulators have weighed new rules for high-frequency trading firms that do major business in U.S. markets, which could require some to continue trading in times of turmoil. Also under consideration are closer scrutiny of trading algorithms used by high-frequency trading firms, and methods to better track their activity.
Durkin said speed traders have been unfairly vilified following the flash crash, while their good points are ignored. “There is considerable evidence that speed traders increase liquidity, narrow spreads and enhance the efficiency of markets,” he said. The liquidity provided by powerful, computer-backed trading groups and other traders is “the best defense against disruptive markets,” Durkin said. “I want to make sure we all are mindful not to chase liquidity away.”