Tuesday, October 11, 2011

Blog 2 Preventing High-Frequency Trading

High-frequency trading is when computers trade thousands of stocks, based on intricate patterns identified, within a matter of seconds. According to the article high frequency trading accounts for 53 percent of all transactions in the U.S stock market. While this advancement in computer technology has made billions of dollars for big firms and banks it has also made the market more unpredictable and inconsistent for the common trader. The SEC has been doing a poor job in keeping up technologically and therefore has had massive problems in regulating high-frequency trading. I believe that in order to protect the legitimacy, authenticity, and legality of the stock market the SEC must attack the problem quicker. The article points out that there is a long process in figuring out when wrong doing as occurred and the author states, “regulators wait weeks to hear back from firms about specific trades. Initially, they do not find out the customer of the trade; they need to follow up with individual trading firms to eventually determine the customer's identity.” I think that in order to accomplish this task, the SEC must synchronize the stock market clocks across the world. Not only do I believe that the SEC needs to improve the computer system, which they are in fact making slight progress on in the recent months, but also come down hard on the offenders. Once they create the technology to find the people who break the law they have to enforce big-time penalties preventing big banks and corporations from breaking the rules.

Recently the SEC has came up with a computer system called the Consolidated Audit Trail (CAT), that will would track stock much more closely than before. I think it is important that the SEC steps in and implants regulations on the this high-frequency stock trading because it will allow the common trader to feel more confident when playing the stock market. The more confident a person is in the system the more they will invest, and the more the stock market will advance in a positive manner. High-frequency trading promotes price volatility which means that the prices on stocks can rise or drop very dramatically. While banks can withstand hard periods the common person might not be able to. The common person is not going to have faith in the market and therefore is going to be reluctant in investing.

I think this situation is a good example of how important it is to stay technologically advanced. Corporations improved and the regulators failed to keep up, and this in effect created an increase in frauds. The more efficient the market is the more attractive it is for companies to buy and sell. Companies don’t want to have a lot of drama around their stock because then people won’t buy them.

Overall I think this is a very important problem that needs to be addressed. The United States is economically unstable and while high-frequency trading can be good sometimes, this practice could affect the depth of a stock market crash.



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