Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Putting A Speed Limit on High-Frequency Trading


In an effort to help prevent another stock market fall-out like the "flash crash", regulators are seeking to reign in high-frequency trading by exploring ways to slow down the rapid trading process.

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So just what ideas are regulators tossing around?

Well, Lord Turner, head of the UK’s Financial Services Authority proposed the idea of a "Turbin Tax," which basically aims to curb the speed of trading by adding taxes into the equation. Mary Schapiro, the Chairman of the Securities and Exchange Commission, however, has indicated the SEC has come up with a more stringent alternative, which includes implementing a "time in force" for orders that would keep high-frequency traders from hastily canceling their orders.

As the Financial Times Gillian Tett points out, while both solutions to the high-frequency trading problem may seem plausible, there is a much more deeply rooted problem with speed in today's markets.

But as the debate intensifies about hyper-fast equity trades, investors and policymakers would do well to remember another point. As a fascinating paper from Andy Haldane, an official at the Bank of England points, what makes the flash crash interesting is that it was not an isolated incident: on the contrary, it epitomizes, in an extreme form, a bigger problem of speed in modern finance.

And while this “speed” issue has not garnered much attention in recent years — partly because most observers assumed that speed was good — it seems that a debate is long overdue. Not only does the financial system seem to have sped up dramatically in recent years, but this trend has caused destabilization in ways that go well beyond the “flash crash”...

Thus investors are increasingly demanding quicker returns. Equity churning has grown: whereas the average holding period for US equity holdings was around seven years in the 1970s, it is now nearer to seven months.

That appears to have promoted more market volatility: though equity prices were twice as volatile as fundamentals back in the 1960s, they have become between six and 10 times more volatile since 1990, with numerous miscorrelations. > Read More at