Sunday, October 9, 2011
How Much is Too Much
This article discusses the rise in high frequency trading and how regulators are bringing new rules and restrictions. They are doing so because they believe high frequency trading makes the market more volatile. This article got me thinking about how much risk/volatility in the market is acceptable. This is very evident in investment tools like high frequency trading, it's chief benefit being that it makes the market more efficient. However as the author points out it also makes the markets more volatile. In addition one screwy line of code in the trading computer in a large firm and you could have a potential catastrophe. Where you strike the balance seems to me to depend on the timescale you consider the problem on. In the short term it will be beneficial, after all it does generate a lot of money for investment banks. However in the long term the risk of catastrophe and the destabilizing volatility argues for heavy regulation.
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Im interested in finding out how much the protests on Wall Street have effected the government's decision to regulate. After all the risky and non backed loans the large banks have given in recent years, I believe that a certain level of regulation should be enforced.
ReplyDeleteI like how the article shows us both the sides of the argument, which are equally strong and make it difficult for me to decide what is really right. I understand that technology is important and the high-frequency of trading will ultimately greatly reduce the costs for ordinary buyer due to the advent of many buyers and sellers in the market. However, large firms with significant technical know-how - like in the case of layering by Swift - could be detrimental for the entire system. Keeping in mind both these viewpoints, I wonder if we can really impose restrictions on technology in today's world. Especially in trading markets, which only seem to be getting more and more complex everyday.
ReplyDeleteI think the argument that this type of trading is negatively effecting the average investor is very compelling. With superior technology the high speed investors can turn a profit easily. I think the fact that people are making quick bucks this way along with the general belief, whether it is correct or not, that high-speed trading leads to market volatility will undermine people's faith in the financial system. That loss of faith might just have a more dire effect on the market than fast trading volatility does.
ReplyDeleteI think the topic of high frequency trading is very interesting, and very controversial. Many who believe that the market is efficient have plausible reason to think so with high frequency trading. The nature of efficiency and volatility should point to tight regulations.
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