Chicago Fed Officials Warned Regulators About Perils Of High-Speed Trading Two Years Ago

Two years ago, the Federal Reserve of Chicago warned the Securities and Exchange Commission about the dangers high-frequency trading posed to financial markets and the overall economy, but SEC regulators have been slow to move on reforms and rules that would limit the practice, according to a Reuters report.

High-frequency trading has caused multiple damaging “flash crashes” in the two years since, and the SEC has instituted small reforms aimed at mitigating the damage. But it is still dragging its feet on large-scale proposals by the Chicago Fed and other proponents of limiting the practice, Reuters noted:

The Chicago Fed said exchanges and other trading platforms should install more risk controls, even if it slowed down trading, including a “kill switch” at the trader workstation level. “The competitive quest for greater and greater speed must be balanced with appropriate risk controls so that a clearly erroneous trade does not destabilize markets by precipitating a cascade of other trades in response,” the Chicago Fed’s then Financial Markets Group Senior Vice President David Marshall said in the submission. […]

And still the move towards reforms has been slow.


Proponents of limiting high-frequency trading include Thomas Peterffy, the man who pioneered computer-based high speed trading in the 1980s. In an interview with NPR’s Planet Money, Peterffy said the speed of today’s trading, which earns traders and firms millions of dollars in revenue by speeding up their ability to make transactions, “has absolutely no social value.” And still, with little oversight from regulators, high-frequency trading has exploded, as this chart from the market research firm Nanex shows:

Germany last week became the first country to make an explicit move toward limiting high-speed trading when its lawmakers approved draft legislation that would require licensing of all trades and limit the number of overall trades made at high-frequency. In the United States, Democratic lawmakers have proposed a return of the financial transactions tax, which would limit trading by levying a small tax on transactions. Such a plan would generate billions of dollars in revenue each year, according to Rep. Peter DeFazio (D-OR), while limiting the market volatility and sudden crashes that occur when high-frequency trades go wrong.