In a study that could only be sanctioned by the independent (read unaccountable) Federal Reserve, the astute researchers at the Fed Bank of Chicago have come to the profound conclusion that faster and less transparent markets (aka high-frequency trading) pose dangers that aren’t properly appreciated. The investing public recognized the dubious role of high frequency trading about 2 hours after the 2010 flash crash. Leave it to the Fed to slam the barn door long after the horse has bolted.
Bloomberg reports:
Faster and less transparent markets pose risks that require more study, according to the Federal Reserve Bank of Chicago, which said high-speed trading may create dangers that aren’t properly appreciated or policed.
“One may also argue that the movement toward HST is part of a natural, evolutionary outcome within financial markets, not unlike the adoption of automated or computer-based systems in every other major industry,” Clark said. “Nevertheless, it is difficult to find examples of firms in other industries that were rapidly brought to the brink of bankruptcy due to technological malfunctions like the 40 minutes it took Knight Capital to lose $460 million.”
While market manipulation has always been a worry, it could be harder to spot today because high-speed firms “trade correlated products across multiple asset classes and trading venues around the world,” Clark said.
Jeremy Jones, CFA
Latest posts by Jeremy Jones, CFA (see all)
- The One Investing Mistake Some Investors Never Learn From - September 18, 2018
- Coca-Cola Getting Back to its Roots - September 17, 2018
- The Prospect of a Decade Long Asset Boom Reversal is Worrying - September 14, 2018