SEC Concerned About High Frequency Trading
from the so-what-do-you-do-about-it? dept
Back in December, we had an interesting discussion on high frequency trading and whether or not it was just (as its supporters’ claim) “adding liquidity to the market to make it more efficient or whether it was a dangerous arbitrage bubble based on questionable practices that put the whole system at risk (or, of course, somewhere in between). The general consensus appeared to be that high frequency trading was pretty bad — and even if you believed that it had some useful applications, the fact that it has come to so dominate the market was not a good thing. The key point was that it wasn’t generating money by doing anything useful, but just from moving money around faster than someone else. Overall, there was definitely a concern about the practice.
It appears the SEC shares your concern, and has voted to do something about it. The real question, though, is what are they going to do — and will it help or will it actually make things worse? It looks like the suggested changes just involve trying to make the brokerages more liable for actions done by unregulated clients using the brokerage’s access to exchanges. The idea is that the brokerages would then force partners to crack down on really risky behavior. While I understand the logic, it worries me. It seems like the opposite of safe harbor type laws on the internet, and would, in fact, make “service providers” more liable for actions of third parties. That always seems like the wrong approach. It’s outsourcing policing and risk management and hoping that by adding liability the service provider will do a good job of it. But what if the service provider can’t do that well? And what if the third party screws up anyway? Does it make sense to put blame on someone who is effectively a middleman?