Regulators in the United States and overseas are cracking down on computerized high-speed trading that crowds today’s stock exchanges, worried that as it spreads around the globe it is making market swings worse.
The cost of these high-frequency traders, critics say, is the confidence of ordinary investors in the markets, and ultimately their belief in the fairness of the financial system.
“There is something unholy about them,” said Guy P.Wyser-Pratte, a prominent longtime Wall Street trader and investor.
“That is what caused this tremendous volatility. They make a fortune whereas the public gets so whipsawed by this trading.”
Regulators are playing catch-up.
In the United States and Europe, they have recently fined traders for using computers to gain advantage over slower investors by illegally manipulating prices, and they suspect other market abuse could be going on.
Regulators are also weighing new rules for high-speed trading, with an international regulatory body to make recommendations in coming weeks.
In addition, officials in Europe, Canada and the United States are considering imposing fees aimed at limiting trading volume or paying for the cost of greater oversight.
Perhaps regulators’ biggest worry is over the unknown dynamics of the computerized stock market world that the firms are part of — and the risk that at any moment it could spin out of control.
Some regulators fear that the sudden market dive on 6 May 2010, when prices dropped by 700 points in minutes and recovered just as abruptly, was a warning of the potential problems to come.
Just last week, the broader market fell throughout Tuesday’s session before shooting up four per cent in the last hour, raising questions on what was really behind it.