Friday, April 26, 2013

High frequency trading and market manipulation

High frequency trading (HFT) is becoming increasingly common on Wall Street.  It has fast become the most dominant force behind stock price movement and has been the catalyst for at least two major sell-offs in recent years.  As such, it’s coming under close scrutiny as being a potentially destabilizing force in dire need of control.   

Analyst Bert Dohmen of Dohmen Capital Research ( has made an interesting observation concerning high frequency trading:

“Since May 6, 2011, HFT (high-frequency trading) operations have no longer acted to knock the market down, even on a daily basis.  On that day, the DJI tumbled almost 1,000 points in less than an hour.  The regulators at first blamed it on a ‘fat finger,’ that is, some clerk with a fat finger pressing the wrong key on a computer.  That excuse was laughable.”

Dohmen further observed that more information revealed that HFTs had played a big role.  He contends that since then, U.S. securities regulators have been artfully dodging the subject of HFT regulation whenever it’s brought up.

“For the sake of discussion,” writes Dohmen, “let us assume that the regulators were approached by the Fed to put the situation to good use.  If HFT can be used to knock the DJI down 1,000 points, it could be used to make the market rise a similar amount.  Of course, it would have to be done gradually in order not to cause any suspicions.  So a deal could have been made with the HFT industry to either cooperate or be regulated out of business.  ‘Cooperation’ would mean that HFT will let their algorithms work only to the upside, not the downside.  How else can we explain the strange behavior of the markets?”

It would certainly explain a lot.

No comments: