18 Sep 2011

HIgh-Frequency Trading - The rise of the machines

The people at the Robin Hood Tax network have recently posted an article about the dangers of High Frequency Trading (HFT), that got a mention in a Guardian piece on the 23rd August. The article warns about the dangers of a system where as much 77% of trading in the UK is done by computer algorithms that can buy and sell at speeds that are completely beyond the control of humans. It was HFT that led to the so-called "Flash Crash" on May 6th 2010 where the Dow Jones went down several hundred points in a matter of minutes.

The report notes that HFT is not used for normal share trading in the UK, probably because there is a 0.5% stamp duty to be paid - Europe's best example of a financial transaction tax. They note that
"a significant proportion of the turnover in UK equity markets is made up of trading related to derivatives called ‘contracts-for-difference’(CFD). These are exempt from stamp duty and are thought to contribute to high and rising level of HFT in UK markets.In fact CFD trading is already so widespread in the UK that if all the CFD-related turnover (€1.3 trillion (£1.1 trillion)) were directed through stamp duty eligible trades, it would generate as much as €6.5 billion (£6 billion) in revenue."

All of this argues very strongly for introducing an FTT simply on the grounds that High-Frequency Trading needs to be kept under control. The Robin Hood Tax report also noted that the problem is set to increase with the rapid rise in the number of Exchange Traded Funds (ETFs) that were apparently behind the abilty of a "Rogue trader" to lose something like $2 billion for his employer UBS. The warning came too late for UBS, but the entire system needs to be protected from this insanity.

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