Supercomputers VS High-Frequency Trading: Analysis Leads to New Regulatory Law

According to ScienceWorldReport,

When there’s money to be made, most loopholes have already been  explored and exploited – but emerging technologies are changing the  game, creating new opportunities for moneymakers and headaches for  regulators. To counter this, researchers are now using supercomputers to help regulators  determine which policy changes will ensure a fairer, more stable market.

New York City

New York City

With the advent of high-frequency trading, traders can use superfast  computers – essentially supercomputers of their own – to compete in the  market, taking advantage of brief price differences to clean up on  profit. For example, if a stock is momentarily priced slightly lower in  New York than in London, high-frequency traders can almost  instantaneously buy and sell for risk-free returns.

Such rapid-fire trading – trading often completed in microseconds, or  even nanoseconds – can lead to market instability, and regulators  haven’t been able to keep up with these shenanigans of high-frequency  traders. This volume makes it significantly harder to identify the root  cause of a problem. For example, when the Dow Jones fell nearly 1,000  points in 20 minutes in the ‘Flash Crash’ of May 2010, it took US Securities and Exchange Commission regulators five months to analyze the data and figure out what  happened. As it turns out, the culprit was flawed automated trading  software.

However, sometimes it’s not a software glitch that’s causing  the problem. Sometimes high-frequency traders are causing market  instability on purpose with a practice called ‘quote stuffing.’  Essentially, a high-frequency trader places an order only to cancel it  in .001 seconds or less, solely to cause congestion. The trouble: It all  happens so quickly that it’s hard to prove. That’s where supercomputers  can help.

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This entry was posted in Foreign Exchange, High Frequency Trading, high-frequency journalism, NYSE and tagged , , , , , , , . Bookmark the permalink.

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