Just How Dangerous Is High-Frequency Trading?

Posted by admin on Nov 3, 2009 in credit crunch, stock market, stock market crash | Subscribe

In a story on the BBC today, Lord Myners, Minister in the Treasury (UK), warns that HFT (otherwise known as high-frequency trading) could put large corporations at the mercy of automated speculators.

He is probably right.

Much of the blame for the stock market drop in 1987 lies at the door of automated trading programs. At the time, they were en vogue on Wall Street amongst fund management companies. As the markets started to fall, the automated sell orders started to kick in simultaneously. The effect was to take the market - Wall Street suffered the most - into a nosedive that was only stopped when the market was closed.

Steps were taken to remove some of the automated nature of these orders to - hopefully - prevent such an event happening a second time. A couple of generations of traders later, and it appears that the technology is making a big comeback.

One question ought to be answered though…

Since when has the market not been under the influence of major players and speculators? Ever?

This is an important question, the super-rich seem to control such a large portion of the world’s assets (often highly leveraged via the use of borrowing and hedge funds) that they must account for a substantial portion of global investment.

As can be witnessed by following the news related to the English Premier League (football / soccer), a location awash with billionaires, they suffer financial problems as well. Theirs are simply on a much larger scale than the rest of us.

You know the thing, you borrow a lot of money, lend it out globally, become a banking titan and then the credit markets change and you bankrupt Iceland. It is all just a simple misunderstanding, an accident if you will. We have all had similar problems, don’t tell me you haven’t

So which is better, trading by algorithm or oligarchs and billionaires? Talk about a rock and a hard place!

What must have become evident over the last 18 months is that the operation and regulation of trading and financial markets is too important to not take very seriously.


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