Trading Speed: Time to Put the Brakes On?
Traders Magazine Online News, July 30, 2010
The drive towards faster trading speeds may be hitting a wall.
In the wake of the May 6 "Flash Crash," the Securities and Exchange Commission, academics, and industry professionals are swapping ideas about capping trading speeds at some level. If any of the ideas are translated into regulatory initiatives, the repercussions would likely be significant.
Michael Goldstein, Babson College
"Trading happening at one millisecond or faster isn't the purpose of the stock market," Michael Goldstein, a professor at Babson College who took part in a SEC roundtable last month, told Traders Magazine. "It's to allocate capital, and I believe it hasn't been doing that any better than in 2007, when markets were slower."
In 2007, Regulation NMS went into effect and unleashed a torrent of high-speed trading in stocks listed on the New York Stock Exchange. Since then, so-called high frequency traders have come to dominate stock trading, driving the industry to reduce the latency of its infrastructure.
The activities of high frequency traders and the dramatic increase in trades done within one second have been blamed for destabilizing the market and putting long-term investors at a disadvantage.
Some consider the events of May 6--when the market plunged by 7 percent in less than 20 minutes and then roared back--as sign of a market drunk on speed.
Now comes the pushback. The SEC is mulling three ideas to rein in the speed of trading. First, it could mandate a floor of some sort on the overall movement of data. Second, it could require the batching of trades at exchanges, allowing them to execute only at minimum intervals. Third, it could mandate a minimum time that quotes must remain accessible.
An overall floor, or speed limit, has Goldstein's endorsement as well as others'. Jeff Donovan, a partner at Nanex, a provider of market data feeds, who has been critical of the performance of the exchanges on May 6, suggests a limit of 50 milliseconds.
"It's getting to the point where it's not funny anymore," Donovan says. "If most of those quotes the high-frequency traders are spitting out are meaningless or an exchange is doing it to say they are providing liquidity. A limit would level the playing field and eliminate a lot of the garbage we see going on without really affecting any legitimate trades."
While others contend speed limits would be difficult to implement and enforce, batching and the concept of a "minimum quote life" are being taken seriously.
Batching would effectively transform the stock market into a series of mini call auctions, whereby traders meet every second or so to transact. The SEC first broached the idea in January in its Concept Release exploring market structure.
Batching has at least one industry proponent. Thomas Peterffy, chairman and chief executive of Interactive Brokers, which operates the Timber Hill market making unit, has petitioned the SEC to batch all trades for 100 milliseconds except for those of registered market makers.
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