High Frequency Trading

High frequency trading -- in which offers to buy or sell exist for small fractions of a second and assets are held for only a few seconds -- has received much attention, especially since it was implicated in the May 6, 2010 "flash crash" of the stock market.  The inconclusive report on that hair-raising event and much of the commentary on the practice since then shows that regulators and market participants do not know nearly enough about how that trading is actually done to sustain wide-spread confidence in the integrity of our markets.

Regulators don't know if the HFT programs commit illegal "wash trades" -- where trading is done without exposure to market risk -- or "spoofing" -- where offers are submitted without intending for them to be accepted.  While much lip-service is given to the need to assure market transparency and other characteristics of sound market management, virtually nothing is actually being done to assure that HFT programs are not committing wholesale violations of the law or exposing markets to catastrophic treats.

HFT advocates claim that these programs provide liquidity to markets and lower spreads between buyers and sellers.  Critics claim that the liquidity is illusory because most offers exist for so short a time that they can't be accepted and that low spreads do not compensate for the enormous systemic risk posed by HFT programs.

The widespread confusion surrounding what to do about HFT programs (but see Commissioner Bart Chilton's speech of October 9, 2010 for a conceptual outline of areas for regulatory action), demonstrates the lack of vision provided by our politicians in managing our economy.  The last financial crisis occurred four years ago and we have barely started to restrain the excesses that caused it.  By the time the necessary regulations are promulgated and enforcement efforts -- no matter how feeble they may be -- are gaining some traction, new causes of new crises will once again have the law enforcement posse scouring the horizon for the dust of those responsible.