Bloomberg's Mark Buchanan On Market Stability and MicroSecond Trading

The volatility of the markets of late, and more dramatically since the summer, has been noted and written about by many.  The May 2010 'flashcrash' has been and continues to be investigated.  The conclusion so far?  We can't have it both ways - stability and volatility are not independent events.  And these events can happen quite erroneously as well, witness UAL's plunge in September 2008.  Massive liquidity dries up in seconds.  Negligible to nil spreads on bid ask.  Algorithmic structure to decision making.  And of overall 24-7 world.  Moves in the market that took hours, days, or weeks, now occur in seconds and minutes.


Below I have excerpted some notable passages from this opinion piece.

"High-frequency trading now accounts for almost 75 percent of all buying and selling of U.S. equities, and a race to trade even faster is under way. The technology to trade thousands of times per second has existed for several years, and it won’t be long before that rate is pushed to a million. The fastest exchanges are now executed in about 10 microseconds -- the time it takes a jetliner flying at full speed to travel one 10th of an inch."

"In principle, the very computing technology that has made high-frequency trading possible might also be put to work in controlling the instabilities it creates, possibly through circuit breakers that would kick in automatically on early- warning signs of liquidity disruption. A mechanism for doing that effectively may be a long way off, though, and simple speed limits on trading -- making every transaction take at least a time T, which might be one second, or something else -- would probably be much better in the short run."