Slow down high-speed traders

Pakistan Observer - - EDITORIALS & COMMENTS -

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

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