In a poll conducted earlier this week in the CFA Institute Financial NewsBrief, we asked subscribers if tighter regulation of high-frequency trading would meaningfully reduce technical glitches in the stock market. Not surprisingly, nearly two-thirds of respondents thought that tighter regulations would indeed be effective.
Do you think tighter regulation of high-frequency trading would meaningfully reduce technical glitches in the stock market? (N = 1,007)
High-frequency trading accounts for more than half of equity trades in the United States and for a fast-growing share of trading volume in Europe and Asia. While the trend of faster trade execution has yielded tangible benefits in the form of more efficient markets and lower trading costs, many observers think we’ve reached a point of diminishing returns.
Recent high-profile breakdowns have highlighted risks that accompany the pursuit of ever-faster order execution and have prompted calls for greater scrutiny and tighter regulation of high-frequency trading. Knight Capital Group’s (NITE) $440 million trading-software malfunction was preceded by the disrupted initial public offering of Facebook caused by a computer glitch at the Nasdaq OMX (NDAQ) market, as well as, ironically, a software failure at BATS Global Markets that forced the exchange to cancel its IPO the day it was to go public. Although these were isolated incidents, and financial damage was largely contained, they have served to further erode the public’s confidence in the integrity of markets and have raised fears of a larger, more systemic breakdown with far-reaching effects.
The issue is finally getting the attention of central bankers and regulators. Last month, the Bank of England’s Andrew Haldane gave a policy speech, titled “The Race to Zero,” in which he cited the systemic risk created by high-frequency trading and the need for a “redesign” of markets. And in the wake of the Knight Capital meltdown, the Securities and Exchange Commission (SEC) announced that it would convene an industry forum in September, titled Technology and Trading: Promoting Stability in Today’s Markets, to explore safeguards for automated-trading systems.