LEVELING THE PLAYING FIELD
Jul. 15, 2014
Investors around the world are drawing on computers that can buy or sell a stock in a millionth of a second. About half of all deals in the US are done using what’s called...high frequency trading. Critics say some people have made abnormally high gains. And they’re calling the technology an unfair advantage. NHK World’s Rosa Sobrino explains.
Major stakeholders who testified at a recent Senate hearing on high- frequency trading took conflicting positions on the issue.
"It is one where, with increased exposure and increased transparency, everyone knows exactly how the game works, but right now a lot of it is opaque."
Brad Katsuyama / President & CEO, IEX Group
" Today our equity markets are widely considered to be the most liquid, transparent, efficient and competitive in the world."
Joe Ratterman/ CEO, Bats Global Markets
What is the problem with high-frequency trading? Some say it might enable predatory trading.
Imagine investors who try to make a large, one-time purchase of a certain stock. To keep the purchase price low, the investors buy through a broker that purchases the stock via several different stock exchanges and trading venues.
But the purchases are not completed at the same time. The first purchase alerts predatory HFT traders who have high-speed computer servers and systems. They can figure out the demand and in a fraction of a second, can corner the market.
As a result, the price of the stock goes up and the investors must spend more money to complete their purchase.
A Japanese Canadian executive in the finance industry testified at the Senate hearing.
Brad Katsuyama plays a key role in a best-selling book about problems with high frequency trading. It was written by acclaimed author Michael Lewis. The book sparked heated debates on Wall Street. Katsuyama founded a new trading venue last Fall to help reform the market. On his company’s trading platform, transaction speeds are limited to prevent predatory high- speed traders from exploiting the system.
" The people who are buying the technology, they end up winning more than the other person. So really, technology has delivered huge benefits, but those benefits have been dampened by the fact that the market has, in a way, disadvantaged certain people."
Brad Katsuyama / President and CEO, IEX
Not all high-frequency trading strategies are bad for the market. But questions remain about how to make the system more transparent and fair.