Regulatory Outlook: The High Frequency Trading Landscape in 2012

Many investors remember the “flash crash” in the United States stock market in March 2010. During this time the Dow Jones plummeted by 998 points. This crash was the result of high frequency trading. The fear is that this type of high speed trading may cause irreparable damage to the markets worldwide.

General Concerns Regarding High Frequency Trading

The main concern is how high frequency trading strategies will affect investors world wide. Most high frequency transactions are place within mille seconds. This high frequency trading accounts for over 65% of all stock trades. Many are concerned that high frequency trading strategies based on volume overlook other stock market bullish vs bearish . People once again feel that Wall Street is benefiting at the cost of individual investors. Of particular concern is how HFT strategies will impact long term investors in the stock market.

Advertisement

The SEC Major Concerns Regarding High Speed Trading.

Co-location is a major concern for the SEC. Co-location is the process where securities firms and traders place their file servers close to exchange trading centers. High frequency traders say this can shave milliseconds off the trading process. Many feel that co-location gives these firms an unfair advantage.

Advertisement

Many regulators have requested a ban on flash trading. The trading order is displayed for less that a second to a portion of the trading floor. This allows the trader to execute the trade with the very best pricing. Many believe this gives an unfair advantage to traders with the fastest computers.

The SEC also plans to address dark pools trading. These private trading venues operated by brokers do not display prices. Many regulators feel that this is drawing volume from regulated exchanges. Only a select few see the pricing leaving out the majority of the market.

Advertisement

The SEC is also concerned about naked access trades. With the naked access trades brokers allow their clients to execute non supervised trades on various trading exchanges. This practice helps firms execute orders faster than other trading firms. The major concern is unregulated trading by non professionals may be harmful and possibly damage the markets.

The SEC will publish their concerns on high speed trading. They will seek feedback and comments on their report for 90 days. According to the SEC there is a laundry list of concerns regarding HFT. The results of the SEC review may impose new guidelines for this type of activity, which will need to be examined.

Share This Story

Get our newsletter