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<No.530>
High Frequency Traders Under Scrutiny
Technology has made stock trading easier, enabling worldwide participation in U.S. financial markets.

Now, with advanced super computers and agreements with trading exchanges, some companies are able to trade stocks in fractions of a second.

The practice, known as high-speed trading, is controversial.

But as St. John’s University professor Michael Perino points out, traders have been trying to speed up the process as long as there have been securities markets.

"There’s a great old story.

Apparently, the Rothschilds used carrier pigeons to get word of Napoleon’s defeat at Waterloo before everybody else and made money in the London Stock Exchange that way.

And, through telegraphs and fiber-optic cables throughout the years, everybody is trying to get faster and faster to the same information because it gives them a competitive advantage.

High frequency traders just take that to the next degree."

Still, these high frequency trading practices have come under the scrutiny of both the U.S. Justice Department and officials in New York State.

Attorney General Eric Holder confirmed an investigation is underway.

"We at the United States Department of Justice are investigating this practice to determine whether it violates insider trading laws.

The Department is committed to ensuring the integrity of our financial markets, and we are determined to follow this investigation wherever the facts and law may lead."

For a fee, some of the exchanges and financial information services have supplied the high speed traders with extra bandwidth, special high speed switches and ultra-fast connection cables.

With that arrangement, HFT or High Frequency Trading companies can receive information faster and gain an advantage over others in the market.

Drexel Hamilton is a typical full-service institutional broker-dealer.

Like many other broker-dealers, it believes high frequency trading could kill the market place and turn away customers.

Ian Burgess says it makes the market less efficient.

"We see bids all of a sudden disappearing, while we try and go in there and sell stock.

We see offers also vaporizing when we’re trying to buy stock.

So, it makes it much more difficult and much more costly, I think."

The Wall Street Bull is still one of New York’s major attractions.

But, the question is whether it will continue to be an attraction if the investing public loses confidence in the stock market.

Bernard Shusman, VOA News, Wall Street
 

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