(An article by Dean
Carroll, editor of publicserviceeurope.com on 10th July)
In the 17th century, it is
said that the Rothschilds were able to balance stock markets in their
favour by flying carrier pigeons to relay information before their peers.
Today's equivalent is
high-frequency trading. It is hard to believe but more stock market
deals are now carried out by computers than humans, in a number of
areas.
We know that HFT, guided by complicated algorithms, takes
place in a millisecond or even a microsecond but the speed and volume of
deals allows firms to maximise profits. There is no long-term strategy, no
major leverage and only light-touch regulation. In Europe, HFT is estimated
to be responsible for around 40 per cent of equity trades. In the United
States, the figure is closer to 60 per cent.
What's not to like?
I hear you say. Well, HFT creates extreme market volatility and has even
resulted in a 'flash crash'. On May 6, 2010, US index the Dow Jones plunged
1,000 points – or 9 per cent of its total - only to recover those
losses within minutes. This shock was a direct result of HFT. And the
sequence of events was triggered by a single sale of $4.1bn in futures
contracts by a mutual, in an aggressive attempt to hedge its investment
position. This was quickly magnified by HFTs, creating a snowball
effect.
Not only that, the limited uses for such a trading
device are simply to pump up pension funds or to create greater wealth for
the super-rich. All this without truly investing in a productive asset
– a company that might make a difference to wider society. Any
integrity markets might have once had now lies in tatters.
Nobel
Prize winning economist Michael Spence has already
called for HFT to be banned. And Joseph M. Mecane of NYSE Euronext,
which operates the New York Stock Exchange, said: "It's become a
technological arms race, and what separates winners and losers is how
fast they can move."
At this precise moment, the world of HFT is
analogous to a frontier town. Only this time, it is not humans displaying
wild west-style behaviour but the machines we have created. The flash crash
of 2010 was a wake-up call. However, it seems the regulators are still
asleep and we all know where that leads – circa the 2008 global
economic crisis we are still coming to terms with today. Perhaps, carrier
pigeons were not such a bad idea after all.
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