Trading at the speed of light

The rapid meltdown of Knight Trading, whose nifty new software went berserk last week and racked up $440 million in losses in about 30 minutes, immediately reignited the debate on high-frequency trading and how to regulate it.

Many investor relations professionals already held automated trading in contempt. Algorithms, derivatives and lack of fundamental reasons for buying or selling leave IR out of the picture – and focusing on milliseconds seems like the ultimate short-termism. Really, hypertraders care about tiny price moves, not companies.

Since there isn’t much “warm and fuzzy” in high-frequency trading, critics are quick to blame quants and computers for all the perceived wrongs of the stock market. Personally, I’m skeptical of attempts to regulate this kind of trading out of existence. I prefer a free market approach, with losses for players who make mistakes as Knight did – and rewards for smart investors or traders.

The most interesting piece I’ve read since the Knight Trading fiasco was not in the financial papers, but in Wired Magazine: “Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading” is somewhat critical of high-frequency trading:

Faster and faster turn the wheels of finance, increasing the risk that they will spin out of control, that a perturbation somewhere in the system will scale up to a global crisis in a matter of seconds. “For the first time in financial history, machines can execute trades far faster than humans can intervene,” said Andrew Haldane, a regulatory official with the Bank of England, at another recent conference. “That gap is set to widen.”

This movement has been gaining momentum for more than a decade. Human beings who make investment decisions based on their assessment of the economy and on the prospects for individual companies are retreating. Computers—acting on computer-generated market trend data and even newsfeeds, communicating only with one another—have taken up the slack.

What I found most interesting are the insights science writer Jerry Adler offers into the mechanics behind making our computer-driven marketplace ever faster and faster. If you like tech, read the Wired piece: This is science fiction becoming reality in the capital markets where we labor as IR professionals.

Technologies continue to advance, trading times are still accelerating and we probably haven’t seen our last scary moments in the stock market. To most IR people, super-fast trading is just “noise.” To me, it’s a very different kind of investing – not for me, but not a phenomenon I want Congress to try to ban. Politicians could wreak unintended consequences by trying to codify whether 15 or 20 milliseconds is too fast, 5 or 10 simultaneous orders are too many and so on.

An IR professional, I think, should stick to the job: Understanding markets for the company’s securities, telling the story to investors who do have an interest in the business and its value, and building relationships across the capital markets.

What’s your take on computerized trading and what it means for IR?

© 2012 Johnson Strategic Communications Inc.

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