Payday Loans and Fast Cash Guide | Rogue High Frequency Trading Systems

Rogue High Frequency Trading Systems

Over the last couple of years, high frequency trading systems have really come to dominate the US equities markets. The average investor or man in the street might never have heard of high frequency trading (HFT), but it’s impact on the markets cannot be understated.

The Securities & Exchange Commission (SEC) however, is fully aware of the phenomenal growth of high frequency trading and has a number of concerns around the practice. So much so in fact, that earlier this year the SEC published a consultation paper on the topic. From the perspective of the SEC, the overall integrity of the markets is being called into question. The regulator will not allow that to happen, so intends to put forward a number of proposals to ensure that all investors are served by the structure of the markets, not jut those with the fastest connections, most powerful computers and smartest software.

It is not just the SEC that is looking into the effects of high frequency trading, the central banks are also making noises on the topic. The Federal Reserve Bank of Chicago for example recently put out its own paper, detailing how the markets could go into meltdown if rogue trading systems started sending millions of spurious orders into the exchanges’ electronic matching systems.

The reason that the regulators and central banks are so nervous is because the risks are real. High frequency algorithmic trading systems can, and do, go wrong sometimes. To date, the markets have been lucky because the magnitude of the errors that have occurred have been relatively small. The real danger is of course the possibility of a chain reaction, i.e. if one algorithmic trading system starts sending multiple orders into the market that then trigger other system to do the same, causing a domino effect.

The regulators believe that without the necessary controls in place, it is only a matter of time before this actually happens. To date, there have been instances of smaller errors occurring as a result of trading systems from Credit Suisse, UBS, Morgan Stanley going wrong.

It’s not just the US that is facing these issues. High frequency trading is now a global phenomenon. The High Frequency Trading Review reports on a case in Novemebr last year where the London Stock Exchange was brought to its knees by a suspected rogue algorithm. The market was totally down for three hours and although exchange officials refuse to confirm that someone’s HFT system was responsible, it is widely acknowledged that that was in fact the case.

So now the regulators have a battle on their hands to rein all of this in. We will continue to monitor the situation with interest.

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