Algo traders main flash crash victims, market maker RSJ says

Lightning-fast market plunges like the 2010 “flash crash” don’t hurt long-term investors and taxing algorithmic trading will drive the business from Europe, said the founder of RSJ AS, which trades a notional volume of $106 trillion in financial derivatives a year.

Investors would be protected by rules against unethical techniques and an introduction of random electronic delays to slow microsecond transactions by high-frequency trading companies, said Karel Janecek, the biggest shareholder in Prague-based RSJ, the largest such trader on NYSE Euronext’s Liffe derivatives platform.

Regulators worldwide are seeking to improve their understanding of how markets behave and reduce price swings since the May 2010 plunge and recovery known as the flash crash that wiped out about $862 billion in U.S. equity value in minutes. They’re also working to determine whether methods used by sophisticated traders give them an unfair advantage and if they should crack down on high-frequency deals.

“If we take a manager of private money or long-term investors, they don’t care about flash crashes,” Janecek said in an interview in Bloomberg’s Prague office yesterday. “Who loses money? Not a pension fund. But someone who is actually doing the algorithmic trading might lose money if there is a flash crash for 30 seconds and they have a stupid system and he sells for a low price.”

Founded in the Czech city of Pilsen in 1994, RSJ trades financial derivatives with notional volume exceeding $106 trillion. It’s one of the largest traders on the Chicago Mercantile Exchange and Deutsche Boerse AG’s Eurex in Frankfurt, according RSJ data.

Stricter Rules

While high-frequency traders didn’t cause the 2010 rout, their method of buying and selling rapidly led to the sudden removal of liquidity from futures markets and triggered a plunge in stocks, a report by the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission said in September 2010.

SEC Chairman Mary Jo White said Sept. 24 “there is an advantage of speed,” with the practice, yet it’s not clear if the impact is helpful, harmful or both.

The SEC plans to publish data, research and analysis using the type of market data exploited by high-frequency trading firms, which use complex computer algorithms to spot and exploit price discrepancies in a fraction of a second. The effort is meant to use data-driven analysis to determine if technology has given some traders an unfair advantage.

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