Focus on: High Frequency Trading and the Troubled Markets

Bloomberg Law’s Lee Pacchia talks with Ralph Ferrara, partner at Proskauer Rose and General Counsel of the Securities and Exchange Commission from 1978 to 1981, about high frequency trading, the problems it caused, and what solutions are needed. Some highlights:

  • “What we’ve pulled out of the process is human judgment making; that’s got to be introduced back into it one way or the other.”
  • “Every person in this business took a deep breath after what happened to Knight Capital occurred, and they went back and said ‘my god, there but for the grace of God there goes I.’ Everybody’s worried.”
  • “If they all stopped tomorrow, [with] high frequency trading, you’re still not going to have retail investors believe that there’s some qualitative judgment that’s guiding these markets as opposed to just quantitative switching.”
  • “… when all of the experts go through all of the different alternatives for dealing with what they call ‘this problem,’ you’re going to find that introducing the concept of human judgment – one way or another – back into the trading process is going to be the answer.”

[Link: Ex-SEC GC: Financial Markets Aren’t Rigged, They’re Broken]

For your reference, a roundup of recent commentary and analysis on high frequency trading and related issues:

Drop Copies vs. Kill Switches: What’s Next for High-Frequency Trading? (Shipkevich PLLC):

“Opposition is growing against the CFTCs preference for using the kill switch as a way to prevent mistakes caused by high-frequency trading… Kill switch technology would terminate erroneous trades, at which time exchanges and brokers could discuss the nature of the trading errors. Yet kill switches could potentially come in different forms, with widely varying response times. Now, criticism is mounting against kill switches as a catch-all option—or even an option at all—for reining in aberrations in high-frequency trading.” Read on>>

Roundtable Recap: SEC’s Technology Panels (MarketsReformWiki):

“In the wake of Knight Capital’s loss of $440 million on August 1, 2012 and the glitch-ridden IPOs of BATS and Facebook earlier this year, the SEC convened a roundtable discussion of market technology on October 2. In an opening statement, SEC Chairman Mary Schapiro noted that ‘thanks to technology, our securities markets are more efficient and accessible than ever before.’ Nonetheless, she highlighted automated trading’s role in this year’s high-profile market disturbances, ascribing the problems to ‘basic Technology 101 issues.’” Read on>>

SEC Rejects “Kill Switch” Regulation for High-Frequency Trading (Shipkevich PLLC):

“High-frequency trading (HFT), which uses algorithmically-charged software to post trades in nanoseconds, has been blamed for several failures in global trading over the last year. One high-profile case saw U.S. broker Knight Capital Group lose more than $400 million in only 45 minutes. This ‘flash crash’ occurred when a bug generated thousands of erroneous stock orders.” Read on>>

Buckets and Cheetahs? The CFTC’s Chilton on High-Frequency Trading (Shipkevich PLLC):

“U.S. Commodity Futures Trading Commission (CFTC) commissioner Bart Chilton delivered an address to the High-Frequency Trading Leaders Forum in Chicago, Illinois… Chilton’s address outlined the CFTC’s position on a range of topics related to the regulation of controversial high-frequency trading practices. The address included Chilton’s trademark wordplay—Chilton coined the term ‘cheetah’ to describe high-frequency traders—and repeated reference to the film Wayne’s World.” Read on>>

Reed Says Market Disruptions Are “Wake Up Call” On Computerized Trading (Bloomberg Law):

SEC Approves New Exchange Rules Addressing Extraordinary Stock and Market Volatility (White & Case LLP):

“On May 31, 2012, the Securities and Exchange Commission approved two rule proposals made by the national securities exchanges and by the Financial Industry Regulatory Authority that are designed to address extraordinary volatility in individual exchange-listed securities and the broader US stock market. Among other things, the new rules are designed to address events such as the severe volatility that occurred on May 6, 2010, colloquially known also as the ‘flash crash,’ when the Dow Jones Industrial Average lost more than 600 points in five minutes.” Read on>>

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