Essay # 1

- A Speed Limit for the Stock Market - High-Frequency Trading - Germany Acts to Increase Limits On High-Speed Trades

23/10/2012 Comercio y Finanzas Internacionales 8vo B

Tedy Idrovo

Tedy Idrovo M. UNIVERSIDAD CATOLICA DE SANTIAGO DE GUAYAQUIL Comercio y finanzas internacionales - 8vo B

A Speed Limit for the Stock Market

Nowadays there are a lot of people who are trading at any moment within the stock market, and even the best trader do not understand why some share or stock of any or prestigious company which they invest have critical changes in one second, thats why they are situated in the stock market, to be aware of the movement of value in the companies that they invest which are shown by computers and executes the respective trade. People in United States are trading in stock market every day but nowadays several countries are starting to regulate the high frequency trading (H.F.T) and the expertise of the United States consider the liquidity and the speed of the market could move to discuss about it. So they are worried about these market blowups, so expertise and entities like the Senate banking committee and the Securities and Exchange Commission are taking part of it. The purpose of financial markets is to always show the change of values of the shares of any company to investors or other companies, with this and probably other related information investors must analyze and be able to decide in which market invest. So a well functioning market can attract investors having a constant developed. So in other words is very important that people allocate their resources in some market. As I said before investors allocate their capital in different markets according to their analysis, so every market depends of the investment realized by people but they must know that signals to determine which market choose could change in one second and that make the investment useless. During the years the technology is increasing and now is very common the electronic trades and that was very helpful for the market because the trading cost of the investors go down but nowadays the trend has stopped, suggesting a point of diminish returns. Thats why David Lauer, a former trader, told the Senate panel that high-speed technology was a destructive force in the market with no social benefit. The high frequency trading (H.F.C) is creating potential scale problems, because with that speed trading the investors not can see the different changes on the value of the companies which they invest, so obviously they cannot take advantage of it. Besides that the greater preoccupation of investor is that they cannot be able to have judgments of the thing that they cannot see and this job probably will realized by high speed robots, so thats why the market is having destabilizing crashes. Countries like Germany, Australia and others are proposing solve this problem by lawmakers who are creating restrictions on high speed trades that make people stop the speed of the market and continuously let them get out from that crisis.

Tedy Idrovo M. UNIVERSIDAD CATOLICA DE SANTIAGO DE GUAYAQUIL Comercio y finanzas internacionales - 8vo B

High-Frequency Trading
As I said before the high frequency trading is known as H.F.T. and its the biggest problem of Wall Street in the next years because nowadays its contributing enormous to the hair-raising flash crashes and composed hiccups which is alarming everyone. This does not always happen that way, in the 1980s H.F.T. have a significant part of the wall street scene when it was blamed for exacerbating the market plunges but after that the computers were involved to the development of algorithms which make the trade more sophisticated and more exactly which was good for the financial markets trading stocks at warp speed and creating billions, because the constantly criticism the H.F.T. is a present theme that expertise and investors are discussing because some people and investor think that H.F.T. needs regulations that helps the people which are being affected who are the ordinary investors. On the other hand, the firms are looking for the way to avoiding regulators stop their ordinary activities and nowadays they are preparing enormous investment in hiring professionals and expertise that defend their interest. Its important to know that primary High Frequency Techniques were used by Wall Street banks and hedge funds, nowadays there firms that represent the higher part of this activity. This is because they employ dozen to hundred people with are trading with the money of the owners of the firm and scooping up as many shares as they can to sell them in a minute, gaining at least a cent per share, so they are moving enormous quantities because they can move million of shares around a minute.

Now Regulations, Outside the U.S.

Industry leaders and regulator in several countries are development a series of technological issues that define the United States markets which as I said before is creating problems to the ordinary investors. So there are a lot critics about this procedure in the united states where investors are been hit by a series of market disruptions, like the flash crash of 2010 and the runaway trading by knight capital which cost it $440 millions in just hours.

Background
Many years ago, stock exchange was very easy for Wall Street, buyers and sellers meet on a exchange floor and they dickered until make an agreement. After this, in 1998 they focus on compete with marketplaces and develop a strategy in which any people or investor could have access to the market only with their computer and obviously a good idea to invest. The problem is that ordinary investors computers have no comparison with the Wall Streets computers which have powerful algorithms which execute millions of orders in a second and scan different public and previous marketplaces simultaneous. High-frequency traders often try to confound other investors issuing and canceling orders, so they take advantage because they see how others act by their movement and make then give up their profits.

Tedy Idrovo M. UNIVERSIDAD CATOLICA DE SANTIAGO DE GUAYAQUIL Comercio y finanzas internacionales - 8vo B

Flash Crash: Computers Gone Wild

In 2009, the S.E.C. began think that many firms needs extremely control because they notice that some sectors have enormous quantities of profits, like billions of them, so they start to critics their technological power that give them the advantage besides the ordinary investors. In 2010 occurred the flash crash and that was the more critical moment to the Wall Street history, there were many others crashes at minimum scale called mini flash crashes and thats why this theme is preoccupant to investors and that why so many parts involved in those operations are taking part to regulate this problem.

Cracking Down
As I said before, nowadays regulators are creating systems in the United States and Europe to fined traders who use technological issues to take advantage against other investors and manipulate the prices of the marketplace. They are thinking in new rules of high-speed trading and a regulatory body which take care about the accomplishment of this rules and they are preventing new flash crashes and use technological issues to stop trading after violent moves. So they were applying different strategies against this, like in 2011 which approved the large trader rule which ask for information about the activities to trade the trades of the firms which best quantity of businesses. Obviously there are a lot of controversial actions too, like proposal to the financial tax on speculators. But S.E.C. is wasting their forces to develop a system called a consolidated audit trail which will monitor the trade in real time.

Overseas Regulations Advance

Different governments are helping to regulate these problems, like the German, Australian, Canadian and other government. German government thinks to force high-speed trading to register with the government to having a better control and limit them the power of make and cancel orders which is the main strategy to confound other investors. Australia government suggest the intention of acquire the necessary technology like computer-driven trading firms which will monitor and force them to continuously testing system. And finally Canadian government had probably the most efficient idea which is that regulators increase the fees charged to firms that collapse the market with orders. Nowadays there are a lot of debates about the new regulations to this H.F.T. which have new rules to investors; there are a lot of complaints which are trading right now.

Tedy Idrovo M. UNIVERSIDAD CATOLICA DE SANTIAGO DE GUAYAQUIL Comercio y finanzas internacionales - 8vo B

Germany Acts to Increase Limits On High-Speed Trades

Germany intend to be one of the first countries that stop the problems caused by the high frequency trading, and they want to achieve this rattling stock markets with the computerdriven. Besides the chancellor Angela Merkels government approved draft legislation that provide a high control on such trading having powerful algorithms and limiting the number of orders to placed, and if they do not follow this rules they will be sanctioned according to the respective law. Obviously these algorithmic transactions provide variety of new risks and the respective legislation will create transparency, security and better overview. As I said before this subject has caused a lot of disruptions in the last years like the problems with newly installed software caused the knight capital groups, which lose $440 million because of buying and selling million of shares in more than 100 stocks for about 45 minutes after the market opened that day, and that trades make the prices many stocks and finally they have to sell the shares back into the market to a lower price. Thats why German officials are aware to include technological advances in their control and reformulate a better law to be aware of a emergence of new tricks of high frequency traders, and they are working on it like other countries around the globe.