(Bloomberg) — Lightning-fast market plunges like the 2010 flash crash dont hurt long-term investors and taxing algorithmic trading will drive the business from Europe, said the founder of RSJ AS, which trades a notional volume of $106 trillion in financial derivatives a year.
Investors would be protected by rules against unethical techniques and an introduction of random electronic delays to slow microsecond transactions by high-frequency trading companies, said Karel Janecek, the biggest shareholder in Prague-based RSJ, the largest such trader onNYSEEuronexts Liffe derivatives platform.
[Transaction Taxes Don’t Help Markets, Researchers Say]
Regulators worldwide are seeking to improve their understanding of how markets behave and reduce price swings since the May 2010 plunge and recovery known as the flash crash that wiped out about $862 billion in U.S. equity value in minutes. Theyre also working to determine whether methods used by sophisticated traders give them an unfair advantage and if they should crack down on high-frequency deals.
If we take a manager of private money or long-term investors, they dont care about flash crashes, Janecek said in an interview in Bloombergs Prague office yesterday. Who loses money? Not a pension fund. But someone who is actually doing the algorithmic trading might lose money if there is a flash crash for 30 seconds and they have a stupid system and he sells for a low price.
Founded in the Czech city of Pilsen in 1994, RSJ trades financial derivatives with notional volume exceeding $106 trillion. Its one of the largest traders on the Chicago Mercantile Exchange and Deutsche Boerse AGs Eurex in Frankfurt, according RSJ data.
Stricter Rules
While high-frequency traders didnt cause the 2010 rout, their method of buying and selling rapidly led to the sudden removal of liquidity from futures markets and triggered a plunge in stocks, a report by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission said in September 2010.
SEC Chairman Mary Jo White said Sept. 24 there is an advantage of speed, with the practice, yet its not clear if the impact is helpful, harmful or both.
The SEC plans to publish data, research and analysis using the type of market data exploited by high-frequency trading firms, which use complex computer algorithms to spot and exploit price discrepancies in a fraction of a second. The effort is meant to use data-driven analysis to determine if technology has given some traders an unfair advantage.
Transaction Tax
The EU Commission has proposed a plan to levy a broad-based financial transaction tax on trades in stocks, bonds, derivatives and other assets in 11 bloc members.
Janecek said tariffs or penalties wouldnt be sustainable and may drive business to other locations.
If there were a transaction tax or something like that, the business would move elsewhere, to Asia and stuff, he Janecek. It is irrational. It might happen for a temporary time and then go back.
Eurex said on Oct. 1 it will start charging traders who submit an unusually high number of orders in relation to consummated transactions and penalize firms that exceed a daily maximum.
Market Realities
The U.S. Commodity Futures Trading Commission is seeking comment on whether to require registration of automated trading firms, a first step in potential restrictions on high-speed and algorithmic derivatives trading.
Traditional risk controls and system safeguards, many of which were developed according to human speed and floor-based trading, must be evaluated in light of new market realities, CFTC Chairman Gary Gensler said in a statement on Sept. 9.
Market participants are divided over whether regulators should slow down the speed of trading and say that disruptions such as last months three-hour shutdown by the Nasdaq Stock Market will never be completely preventable, according to a Bloomberg Global Poll. The poll showed 43 percent opposing rules to rein in trades and 42 percent supporting them.
Janecek said one solution could be to introduce a random delay of zero to 10 milliseconds in trades, making redundant the fight for microseconds that could set off flash crashes.
Beneficial Trading
As soon as we do that, then the race stops because the race is about tens or hundreds of microseconds, Janecek said.
Janecek said algorithmic trading was purely beneficial in a market-making role because it provided more liquidity and narrowed spreads.
While unethical techniques including market manipulation should be guarded against, flash crashes were not something for normal investors to worry about, he said.
It might be a change of money from one group to another in the same market segment, he said. But for the economy overall, who cares very much other than for the psychological impact? A flash crash doesnt mean a crash like in the 1930s. Its up and down, so who cares?
