STOCKS & BONDS


High-Frequency Trading Kills Market Confidence

Andrew Brooks has spent 33 years on the trading desk at T. Rowe Price, where he is head of U.S. equity trading. We recently spoke with him about high-frequency trading. Here is an edited excerpt of that interview.

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KIPLINGER: Since the 2010 "flash crash," there have been more market glitches, including an errant trade by Knight Capital and snafus during the initial public offerings of Facebook and BATS Global Markets, an electronic stock exchange. Are you concerned?

BROOKS: Those firms—Knight, BATS and Nasdaq (where Facebook debuted)—are pretty tech-savvy companies. For them to have major flaws in their system or inadequate safeguards is troubling. It speaks to this game of getting to the market fastest at all costs. It tears away at the foundation of market stability, all in the name of speed.

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But aren’t most flash crashes momentary events that long-term investors should ignore? What if you have a lot of your net worth in a stock and you look it up during one of those periods and see its price cut in half? You might as well have a heart attack. It’s incredibly disorienting and scary to people, and it undermines investors’ confidence.

Supporters say high-frequency trading makes the market more liquid and gets all of us better prices. Our sense is that high-frequency trading can be destabilizing. It generates a huge amount of market data in terms of price quotes—but most of the quotes are inaccessible and unactionable because the high-frequency firms cancel them so quickly. In a simplified form, their game is to initiate an action with the sole purpose of observing a reaction, and then quickly change strategy to profit from that reaction. The traders get to watch the finish of the horse race, then bet on the winning horse.

What would you like to see happen? This is a chance to experiment with some pilot programs to slow things down—for example, a required time for quotes to be displayed, or a tax on trades that jam up the system with an unacceptably high cancellation rate.

What can investors do? We went to Washington to tell Congress that things were out of kilter. Investors should keep their eye on the big picture, continue to buy shares in good companies and have a disciplined approach. But let your voice be heard. If you think the markets aren’t balanced or fair for everyone, send letters to the Securities and Exchange Commission and your congressional representative.

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