High Frequency Trading: What is the Risk of Another Market Flash Crash

The Securities and Exchange Commission had laid down new rules after the market flash crash last year like bringing exchange traded funds and stocks under the purview of circuit breakers. Circuit breakers are configured to stop trading as soon as a stock or index has fallen by a certain percentage in a very short period of time.

$3.95 Flat-Rate Stock Trades

Is New OptionsHouse Trading Platform Really Worth Your Money?

Now, the US is building security walls and enhancing protection to prevent a rerun of such events. This has resulted in high frequency traders to make a beeline towards other emerging markets, which will lead to these markets becoming vulnerable to a flash crash. In the last years May 6 crash it all started with one trader who tried to sell a large no of E-Mini S&P 500 contracts first ran out of buyers which then was followed by high frequency traders selling which added up to the mutual funds selling and caused the sharp fall.

The same high frequency trading that was one of the causes of the Flash Crash is a high growth source of revenue for stock markets in many developing countries. Countries like Brazil, Russia and South Africa are positioning themselves as excellent opportunities for this type of trading. To lure outside traders many countries are taking the necessary steps, like Russia introduced a new trading platform this year and Brazil reduced the fees for High Frequency trading last year, Osaka stock exchange also introduced a new high frequency and algorithmic trading platform. Many believe that the new global trends are towards increasing algorithmic trading worldwide, mostly over seas. The 10% increase in global stock exchange volumes this year is almost solely fuelled by overseas market. In Russia almost 60% of the exchanges business comes from increased high frequency trading which will only rise. Even the Brazil stock market claimed a 10% increase in revenue mostly pushed by a 70% increase in daily trading. But the question remains are they braced to handle all this extra volume?

The Russians claim their exchange has set up barriers to prevent any flash crash like event, According to them they have put up order limits and are working on more regulations. However Brazil on the other hand has lowered trading fees so as to encourage high frequency trading. They have indeed put up some order limiting regulations but lowered fees still leaves the possibility of a flash crash.

Experts though maintain that exchanges should work together to prevent any such event from happening, putting emphasis on cross region regulation. Tabb Group maintains that the increase in volume of high frequency trading will not be enough to trigger another flash crash, the major concern is the US or Europe based ETFs who are heavily dependant on high frequency trading, and their interest in these economies is a cause o concern. However they maintain that US market is safe from any of their practices causing any untoward incident.

Pick from our selection of recommended brokers to make your retirement investments:- Broker Reviews 2011 Best Commissions and Fees in Stocks, Mutual Funds, ETFs and Options

Will the Current Debt Crisis Change the American Way of Life for Ever?

Comparebroker’s Top Recommended Brokers