An announcement was recently made by the Committee of European Securities Regulators (CESR) that they are undertaking an investigation of high frequency trading (HFT). CESR, who has its headquarters in France, seems to feel that the trading developments that are triggered by this kind of technology need to be watched more closely.

Their investigatory interest is prompted by the fact that the markets seem to be more and more heavily controlled by the big dollars, because high frequency trading is only available to those with deep pockets, involving as it does mega-fast computer systems and powerful servers hosted in close proximity to the various exchanges. The percentages of HFT are alarming, coming in at approximately &0% of the trading in the US and approximately 50% of the activity in the European markets (as reported by the HFT review).

Another concern that CESR has is that high frequency trading is bringing about inequality in the markets, leading to the discouragement of traditional investors and smaller traders. If the market is mostly being controlled by the bigger Wall Street proprietary trading firms that have the funds to actively trade in and out at a rapid pace – at times up to thousands of trades per second – then anyone who does not have this facility is at a disadvantage. To be a major HFT player, you need to invest heavily in technology.

It appears that this will be an on-going investigation and a major debate is now ongoing. It has been noted that there are many traders who want high frequency trading to be eliminated completely. However, the major players with the huge amount of capital to invest continue to use their power to lobby through the government to have this trading activity remain. We are curious to see what the outcome will eventually be. Will the regulators clamp down on the high frequency traders or not? Time will tell!

On what seemed to be a fairly normal trading day on New York Stock Exchange in 2007, things suddenly started to get crazy. Multiple buy and sell orders started to flood in almost simultaneously, immediately followed by cancellations. In a matter of minutes, these orders had run into six figures.

These orders caused a major bottleneck for other traders and investors who were unable to get their own orders executed within acceptable timeframes.

The whole thing came to light just last month when the NYSE fined Credit Suisse for allowing a rogue algorithm to go haywire and send all these messages, unfiltered, into the market.

But what was actually behind Credit Suisse’s activities?

Like many Wall Street firms such as Goldman Sachs, JP Morgan and BNY, Credit Suisse has a proprietary trading desk that runs a number of algorithmic trading and high frequency trading strategies. Using complex computer programs, high frequency trading systems generate multiple electronic orders and send them into the market to try to capture best prices and liquidity ahead of other market participants. Over the last few years this practice has grown to such an extent that it now accounts for up to 80% of all volume on US Equity markets, according to some industry analysts.

The problem with these algorithms however is when they go wrong. Fortunately, the NYSE survived the Credit Suisse episode, which was actually a fairly small-scale error. But if it had been multiplied, it could have brought trading on the exchange to a complete halt. Hence the fine.

Ever since the advent of electronic markets, there have always been errors just waiting to happen. Many of these are down to “fat finger” mistakes, where a trader might buy the wrong stock or the wrong amount of stock. But high frequency trading takes the potential damage from such errors to a whole new scale.

This is one of the reasons why regulators are now starting to tighten up on the whole high frequency trading and algorithmic trading world.