Why Putting a Speed Limit on the Stock Market?

(Dallas News)

(Dallas News)

According to The New York News, when Brad Katsuyama was running the U.S. trading desk for the Royal Bank of Canada, his clients would send in orders every day, but every day, when Katsuyama went to buy or sell, something would go wrong. When he wanted to buy, offers to sell shares would suddenly vanish, and the price of the stock would shoot up. When he wanted to sell, the same thing would happen in reverse. “I started to realize that, day in and day out, I was getting screwed,” Katsuyama told me recently.

The problem was that he was often too slow. Back then, in 2007, the stock market was in the middle of a significant shift. A combination of new technology and new regulations had led to the rise of firms focused on high-speed, computer-driven operations known as high-frequency trading. With the help of complex algorithms and ultrafast Internet connections, the new traders could buy and sell stocks in fractions of seconds, looking to make a seemingly infinite number of quick, tiny profits that added up. By 2009, high-frequency traders were making billions of dollars a year, and their transactions accounted for about 60 percent of U.S. stock trades.

Some of these traders acted like useful stock-market middlemen, constantly buying and selling, bridging the bid-ask gap between other buyers and sellers. But plenty of others used the new technology to foil long-term investors by trading ahead of the slower players. A trader’s algorithm might detect that Katsuyama was trying to buy 100,000 shares of a stock and then immediately start buying it to drive up the price. Indeed, certain high-frequency traders were forcing long-term investors, including those who managed funds that held ordinary people’s retirement accounts, to constantly buy higher and sell lower. The game seemed rigged.

Read more

Advertisements
This entry was posted in Business, Finance, Financial Instruments Directive, High Frequency Trading and tagged , , , , , , , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s