Algo traders main flash crash victims, market maker RSJ says

Transaction Tax

The EU Commission has proposed a plan to levy a broad-based financial transaction tax on trades in stocks, bonds, derivatives and other assets in 11 bloc members.

Janecek said tariffs or penalties wouldn’t be sustainable and may drive business to other locations.

“If there were a transaction tax or something like that, the business would move elsewhere, to Asia and stuff,” he Janecek. “It is irrational. It might happen for a temporary time and then go back.”

Eurex said on Oct. 1 it will start charging traders who submit an unusually high number of orders in relation to consummated transactions and penalize firms that exceed a daily maximum.

Market Realities

The U.S. Commodity Futures Trading Commission is seeking comment on whether to require registration of automated trading firms, a first step in potential restrictions on high-speed and algorithmic derivatives trading.

“Traditional risk controls and system safeguards, many of which were developed according to human speed and floor-based trading, must be evaluated in light of new market realities,” CFTC Chairman Gary Gensler said in a statement on Sept. 9.

Market participants are divided over whether regulators should slow down the speed of trading and say that disruptions such as last month’s three-hour shutdown by the Nasdaq Stock Market will never be completely preventable, according to a Bloomberg Global Poll. The poll showed 43 percent opposing rules to rein in trades and 42 percent supporting them.

Janecek said one solution could be to introduce a random delay of zero to 10 milliseconds in trades, making redundant the fight for microseconds that could set off flash crashes.

‘Beneficial’ Trading

“As soon as we do that, then the race stops because the race is about tens or hundreds of microseconds,” Janecek said.

Janecek said algorithmic trading was “purely beneficial” in a market-making role because it provided more liquidity and narrowed spreads.

While “unethical techniques” including market manipulation should be guarded against, flash crashes were not something for normal investors to worry about, he said.

“It might be a change of money from one group to another in the same market segment,” he said. “But for the economy overall, who cares very much other than for the psychological impact? A flash crash doesn’t mean a crash like in the 1930s. It’s up and down, so who cares?”

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