• Investing & Markets

Must Read: How the Boom in High-Frequency Trading Has Changed the Markets

October 5, 2011 | Daily Capital

High-frequency trading is the new normal — it now makes up the vast majority of trading in U.S. equities. While it’s come under scrutiny following the flash crash in May of 2010, the practice shouldn’t create any detrimental impact to long-term market fundamentals. In fact, it can even improve liquidity during calmer market environments. The downside, of course, is increased volatility in the short-term and investors will have to accept it. Interesting take from Bloomberg columnist and theoretical physicist Mark Buchanan. Give it a read.

 

With High-Speed Trading, the Market Cannot Hold: Mark Buchanan

Last year, when the U.S. Securities and Exchange Commission came out with its final report on the flash crash, the stomach-churning event of May 6, 2010, that wiped $1 trillion of value from the markets in less than 30 minutes, it never managed to explain why the episode happened. A large trade of stock futures by a Kansas firm had sparked it, the report said, and it detailed the ensuing chain of events, without offering much insight into why such a tumult was possible. The report did say the activities of high-frequency traders, firms that use computers to buy and sell thousands of times per second, had helped the trouble spread. Investors today can’t be terribly comforted because hundreds of minor flash crashes involving only a few stocks at a time have struck since then. Earlier this year, for instance, the share price of an insurance company called Enstar Group Ltd. (ESGR) fell from roughly $100 to zero, then rose back to $100 in the space of just a few seconds. Since we don’t know what’s causing these sudden shifts, we can’t be sure that one as big as, or even bigger than, the May 2010 event won’t occur tomorrow, or next week….

Read the full article at Bloomberg News.

 

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