Slow down high-speed traders
TICKET vendors try to block computer robots from scooping up the choice seats at hot concerts and sporting events. Their efforts don’t stop scalping altogether, but they do help stop the most mechanised forms. You’d expect the same would be true in the world of stock trading. You’d be wrong. Superfast high-frequency traders, who’ve built their own telecommunications networks to gain an advantage of a few microseconds over conventional investors, have come to dominate stock trading, largely with the complicity of exchanges and Wall Street banks. Their speed allows them to race ahead of a large order, snapping up shares before the buyer can get to them. It also allows them to place flash orders that are retracted in a split second, giving them the chance to gauge the market before placing an order in earnest.
None of these tricks makes much money. But by deploying them thousands of times in a single second, high-frequency traders have become wealthy by, in essence, imposing a transactional tax on everyday investors. Now comes a plan for a stock exchange that can’t be so easily gamed. The Investors Exchange, or IEX, is best known as the concept profiled in Michael Lewis’ book Flash Boys about the high-frequency trading business. The IEX purposefully slows down orders by fractions of a second, sending them through a 38-mile coil of fibre optic cable, as a way to thwart high-frequency traders. The IEX has been operating as an alternative trading platform and hopes that this week the Securities and Exchange Commission will approve its petition to become a full-fledged stock exchange. For the SEC, approval should be a no-brainer, despite the intense opposition to IEX from powerful interests. High-frequency traders account for about half of stock market volume, these days. So it’s no wonder why exchanges like them so much. Banks profit from them as well in a variety of ways including, in some instances, selling traders customer order data from their own clients. Mutual funds, pension funds and insurance companies that invest trillions of dollars on behalf of millions of people need and deserve markets that cater to them. Corporations need and deserve markets where their shares are bought and sold based on their underlying prospects. And the public at large needs markets less likely to gyrate wildly or melt down as the result of some computer glitch. The IEX is trying to create a fairer market, a place where companies go to raise capital in return for sharing their profits with investors, rather than one where computers rule. — USA Today