Get ready for more high speed trading on the stock markets, and the problems they will cause. Forbes reports of talk about giving traders access to neutrinos traveling at the speed of light. Traders using the technology would on average have a nearly 30 millisecond time advantage, with participating London and Sydney brokerages garnering a full 44 milliseconds. In markets, that would generate many more trades than competitors.
So what could go wrong? Plenty. Computers that buy and sell shares in a fraction of a second are in danger of destabilising stock markets around the world.
In 2010, high speed trading created the flash crash that saw the Dow Jones Industrial Average plunge 600 points in less than 10 minutes. It was a case of computer driven trading with the computers running amok.
The problem with high speed trading, says theoretical physicist Mark Buchanan , is that with high speed trading, the markets cannot hold. He says high speed trading can make markets operate smoothly, indeed smoother than normally, but can do exactly the reverse in volatile periods. It increases liquidity when markets are functioning normally but it has the opposite effect during more troubled times. We're a long way off from finding a solution, so he suggests some obvious controls. "All in all, then, it seems likely that the very high-frequency trading that makes the markets run so smoothly in quiet times does the opposite in stormy times, exaggerating the chaos,'' Buchanan writes. "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."