The following is an excerpt from Dr. John Bates’ recent commentary on HuffingtonPost, which discusses the current state of high frequency trading.
After three years of severe market volatility, and a jaw-dropping flash crash, the financial rock star phenomenon known as high frequency trading (HFT) looks a little burned out. Like many rock stars, HFT seems to be suffering from too many late night parties and some incredibly unflattering press. And its business managers — regulators and exchanges — are watching closely for signs of abuse, making it more difficult for HFTs to get away with anything.
HFT has had a good run. Relatively cheap stock prices made it easy to trade billions of shares with limited capital. High volatility gave HFT algorithms a chance to dive in and out of the market constantly, chipping off fractions of pennies until they added up to substantial profits. But they may have partied just a little too hard, causing more damage than just the May 6 flash crash.
According to a new study by physicist Neil Johnson and his colleagues at the University of Miami, “Financial black swans driven by ultrafast machine ecology”, more than 18,000 instances of ultrafast mini-crashes have occurred over the past five years — almost ten per trading day on average. These mini-crashes took place in under 1.5 seconds, with many happening in less than one-tenth of a second, and moved the stock price by more than 0.8 percent. There is some evidence that the faster the trades, the higher the likelihood of an incident.
Read the full post here.