How to Stabilize High Frequency Trading?

Traders are already feeling the heat from the possible repercussions of the Volckers Rule. While the Volcker Rule struggles to stay alive amidst wave after wave of assaults from bank lobbyists, there is a new threat on the horizon for traders. SEC
Chairman Mary Schapiro is moving to impose fees on every single cancellation
executed on a buy or sell order. High-frequency trading has been under fire for quite some time and the May 6, 2010 “flash crash” did nothing to assuage the criticisms. On May 6, 2010 the Dow Jones fell almost 600 points in 5 minutes (almost nine percent) only to recover minutes later. This brief crash prompted the SEC to implement circuit breakers and ban stub quotes. For Schapiro, however, that is not enough, she wants to attack high-frequency trading at its core.

By levying fees on cancellation orders—which make up approximately 95-
98% of all trade orders—Schapiro hopes to induce trade that does depends
on “the fundamentals of the company that’s being traded” rather than “miniscule
aberrational price move[s].” High-frequency firms say that such regulation would
reduce liquidity in the market, which would drive up costs for borrowing and
acquiring capital. I think while that may be true, not all liquidity is created equal.

Where was this liquidity during the “flash crash”? It disappeared within five
minutes, setting off panic in the markets, which then drove equities even further
down. If anything, I believe it’s a great idea to regulate cancellation orders. It will
force traders to become more careful with their capital. And as Wall Street is apt
to do, they’ll find ways to make it more efficient, which will in return, bring the
liquidity that high-frequency firms fear losing. Hopefully, of a more stable nature.

Norman Bae


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