How do you slow down high-speed trading?

The State of New Jersey shares a unique relationship with Wall Street. In fact, it might be argued that much of New Jersey’s wealth is derived from the financial services industry, with most of that work confined to Lower and Midtown-Manattan. A study conducted by the NYC Mayor’s Office in 2008 found that more than 3 million people residing in New Jersey commute to New York City by train, car, bus, or ferry. It seems inevitable that what happens on Wall Street matters to people living at the Jersey shore.

An interesting development concerning the financial services sector is the growth of high-frequency trading (HFT). High-frequency trading is the use of sophisticated technology to capture gains via the buying and selling of securities on the market. What separates HFT from traditional market activity is the incredible speed at which trades are executed. HFT allows traders to move in and out of positions in milli- and even micro-seconds. Just to put that into perspective, a microsecond is a unit of time equal to one millionth of a second. One microsecond is to one second as one second is to 11.574 days!

The high speeds at which these trades are executed have generated much debate among both its supporters and its critics: Are these rapid-fire bets contributing to a more robust marketplace or alternatively is HFT encouraging riskier and even more dangerous behavior creating a sort of virtual wild-west where short-term gains supplant long-term value creation? In May of 2010, the stock market plunged more than 5 percent recording its largest intra-day point loss, plunging nearly 1,000 points. Following the “Flash Crash of 2010“, the SEC — Wall Street’s principal regulator — concluded that high-frequency trading contributed to the crash.

Since the Flash Crash, financial experts and regulators have debated the merits of increased oversight on HFT. Recently, a firm based out of Red Bank, NJ has asserted itself as a major player in regulating the industry it willingly takes part in. Tradeworx is led by its CEO Manoj Narang, a veteran of Wall Street and a self-proclaimed proponent of HFT.

Narang, who has worked for a variety of financial firms during his career, suggests that high-frequency trading positively benefits market participants while at the same time he recognizes the need for proper safeguards. Tradeworx, who operates a high-frequency proprietary trading business in addition to managing a hedge fund, is now working directly with the SEC to better manage the huge quantities of data it receives on a daily basis. Critics of HFT have suggested that the federal government is always two-steps behind the curve — a late adopter of critical technology that can be used for ensuring a safe and reliable market. Now, companies like Tradeworx that have racked up significant mileage in areas like HFT are extending a helping hand to those policing the industry.

Tradeworx’s Narang has said before that the SEC benefits from industry insiders. Projects underwritten by the SEC that might take 2-3 years before implementation can take less than half that time for private firms like Tradeworx. By consulting with the private sector, the SEC has indicated its own paucity of knowledge. Investors that prefer market stability and prudent regulatory oversight can only hope that more firms like Tradeworx step up to the plate.

Although there remains a healthy dose of skepticism, HFT doesn’t appear to be going away any time soon. A large volume of market activity is now properly defined as high-frequency trading. Tech and financial companies are still investing in upgrading the speeds at which information is transmitted. 14 milliseconds is suddenly too slow, traders are clamoring for a maximum of 8 milliseconds! With the rapid pace of advancements in technology, despite its best efforts the SEC may already be on the outside looking in.

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