Wall Street's high-frequency trading (HFT) controversies reveal the damage it does to longer-term values essential to all markets. But reform is in the works.
By Hazel Henderson
Misgivings were raised in 2012 by Sal Arnuk and Joe Saluzzi in their book Broken Markets and on CBS' 60 Minutes after the May 2010 flash crash, followed by Scott Patterson’s in-depth look at the evolution of electronic trading platforms, the new IT players, in Dark Pools (2012). Frightened retail investors pulled billions out of stock markets after being burned by their losses after 2008 and their growing anger at bailouts of too-big-to-fail banks and their too-big-to-jail executives.
All this fueled the rise of both the Tea Party popularism and Occupy Wall Street. The SEC was unable to address these new issues due to capture by financial industry lobbying, its own revolving door and obsolete computer systems, which were unable to keep up with millisecond and soon microsecond high-frequency trading (HFT) players’ algorithms.
Market-based Reforms Need Strengthening
Reformers like me had called for market-based approaches, including financial transactions taxes (FTTs) of less than 1% on trades – also proposed by former US Treasury Secretary Larry Summers in 1989 and in the 1970s by Bank of Sweden Prize winner James Tobin.
Bitterly fought by the financial industry, FTTs are now collected in many countries and approved by the European Union for its 29 members. However, as many pointed out, electronic markets at HFT speeds are hard to regulate and any such tax (however small) will need to be global to avoid financiers’ threats to move offshore or into the cloud, as I warned in Financial Markets Lost in Cyberspace.
Curbing HFT Excesses
Fast-forward to 2014: Michael Lewis’ exposé in Flash Boys, which took the insiders’ debate to the public on mainstream media, features in a new CBS 60 Minutes episode and clashes on financial shows.
The hero of Lewis’ story, Brad Katsuyama, a trader at Royal Bank of Canada, devised another market-based approach: by creating a new “plain vanilla” trading platform for investors only. The IEX’s technology denies access to predatory practices and HFT players and is finding big clients.
Meanwhile, the SEC’s Mary Jo White is trying to catch up after many of the SEC’s own regulatory staff jumped ship and joined HFT firms. Ethical Markets Advisory Board member Dave Lauer has been a key player in trying to curb HFT excesses and has been helping advise the SEC as well as participating in development of the IEX.
Atomic Clocks: New Hope for Transparency?
Now scientists at Britain’s National Physical Laboratory (NPL) have weighed in. They operate the atomic clocks based on jumps per second of cesium atoms’ electrons, accurate to a few milliseconds and broadcast over radio and the internet.
Although still too slow for HFTs microsecond trading algorithms (1000 times faster), NPL’s atomic clock will be linked to the International Space Station and will be beamed worldwide and to London’s Docklands financial district’s data center. No other traffic runs on this dedicated fiber optic cable, moving the world closer to accurate time worldwide, a goal shared by the U.S. National Institute of Standards and Technology (NIST) whose atomic clock in Colorado could be linked to Wall Street’s data servers.
Stay tuned on how these skirmishes between computers, algorithms and atomic clocks over speed and efficiency may yet be guided by higher goals of trust, transparency and honesty.
The outcome will determine whether traditional markets-based capitalism will survive or whether markets will revert to their ancient roots and roles as time-honored ways humans relate and exchange in their villages and countries.