High-frequency trading — using computer algorithims to trade stocks by the millisecond — has exploded in recent years. One Democratic Rep. is urging the Securities and Exchange Commission to do something about it, using a law that he authored more than two decades ago:
Rep. Edward Markey, a Massachusetts Democrat who has waged a decades-long struggle against computerized trading sent the SEC a hint: The power to curb high-frequency trading has been within its grasp all along.
In his letter, Markey described a law he co-sponsored in 1989 to increase the agency’s power to regulate computerized trading, a precursor to HFT that employed computer programs to make trading decisions without the participation of conscious humans. The law lets the SEC “limit practices which result in extraordinary levels of volatility,” according to Markey’s citation.
Markey, nudging further, added: “If the commission simply makes a finding that the markets are currently in a period of extraordinary market volatility and that HFT is reasonably certain to engender such levels of volatility, the Commission can immediately promulgate rules that restrict or eliminate the practice.”
This chart from the research firm Nanex illustrates how high-frequency trading has grown since 2007, spiking in the aftermath of the Great Recession:
High-speed trading now makes up more than half of the stock market’s volume. During one week in October, one trader alone made 4 percent of the stock market’s trades. As Reuters’ Felix Salmon noted, “The stock market is clearly more dangerous than it was in 2007, with much greater tail risk; meanwhile, in return for facing that danger, society as a whole has received precious little utility.”
In 2010, the Chicago Federal Reserve warned the SEC about the perils of high-speed trading. If Markey is right, the SEC has had the power to do something about it all along.