I doubt whether Germany will be able to do
anything about it substantively. At most it would
simply drive more trade away from the Frankfurt
Stock Exchange to London S.E.. It's not as though
Germany were legislating against speed on one
system, such as a national motorway, where it
could be successful. There is a multitude of
Internet and optic-fibre cable routes by which H-S trading can take place.
H-S trading is only the latest development of
'get-in-quick' before one's competitors. The
earliest example was in the 1840s, when merchant
banks in New York were using radio telegraph to
send instructions to their stock-brokers in
London in order to anticipate information that
would otherwise be travelling by ship across the
Atlantic. (In their case at that time most of the
information would have involved the likely state
of the cotton harvest -- the cotton industry
being one of England largest industries at that
time.) From the 1880s onwards the cross-Atlantic
cable was available to all -- though only via the
cable company at both ends which would make sure
of being well-paid. It wasn't until the 1960s
that private lines could be established. The
first to do so was a small Jewish family-owned
merchant bank, J. Aron, specialists in commodity
prices (particularly gold) with offices in New
York and London. J. Aron kept to a very low
profile and competitors didn't realize what the
bank was doing for years. If, for example, the
gold price in London was higher than New York, J.
Aron would sell a significant amount of New York
gold (their own or borrowed for the purpose) in
London (using certificates for the purpose
instead of transporting the physical stuff) and
then, when the London price dropped (which it
would have done within seconds), buying it back
again. J. Aron's traders aimed to complete such
a paired trade within 20 seconds (although,
overall, there were other subtleties involved in
order to camouflage their operations). That was
high-speed trading in those days! They would only
shave off a small profit each time. Even so, J.
Aron was quietly able to build up massive profits
and they sold out to Goldman Sachs in the early 1980s.
Whereupon, J. Aron's contributions to Goldman
Sachs profits dropped to almost zero during the
next three years! The reason was that although GS
absorbed about 400 JA traders along with the
purchase, most of the original partners, except
one, had sold out in order to retire. They had
been the original innovators and instigators of
their schemes and it took several years before GS
was able to restore previous earnings. However,
it did so and the new department was (and is)
important (it's still called J. Aron). It was
probably the first (my guess) to get into the
beginnings of H-S trading (algo-trading) some 20
years ago. (The original family partners of J.
Aron had already established the Mount Sinai
Hospital in New York [serving non-Jews as well as
Jews] and, after retirement, further endowed it
with most of the sale price received from GS.
Mount Sinai Hospital, is still one of the most
eminent research-based hospitals in the world.)
The interesting (and salient) thing about the
$440 million loss by Knight Capital Group's
customers is that they took the losses on their
own shoulders, didn't sue KCG and remained as
customers. It was because of KCG's advanced use
of H-S that they had previously benefited -- and
wanted to continue to do so. They knew that any
new technique is liable to suffer accidents in
its early phase. Indeed, they would have been
well aware of the notorious NYSM-wide crash of 6
May 2010 which came close to becoming complete
catastrophe involving thousands of businesses.
Since then, exchange-wide circuit breakers have
been installed. In KCG's case the fault was
quickly diagnosed and no doubt it now has its own circuit breaker of some sort.
As to the necessity to restore genuinely liquid,
orderly and fair markets, (Benoît Lallemand
below). Well, this is nonsense. Stock markets
have never been such paragons. They've always
been, and always will be, subject to waves of
human sentiment ("excessive exuberance of animal
spirits" as Keynes said) which can cause more
deep plunges (or mountains of euphoria) than any
technical hitch. The latter can be repaired
within hours or days at the most. Otherwise, the
results of lemming-like human emotions can take
years to settle back to normality.
Keith
At 14:47 26/09/2012, you wrote:
Germany Acts to Increase Limits on High-Speed Trades
* by MELISSA EDDY and JAMES KANTER
* Sept. 25, 2012
*
<http://www.nytimes.com/2012/09/26/business/global/germany-wants-rules-on-superfast-stock-trading.html?nl=todaysheadlines&emc=edit_th_20120926&moc.semityn.www>http://www.nytimes.com/2012/09/26/business/global/germany-wants-rules-on-superfast-stock-trading.html?nl=todaysheadlines&emc=edit_th_20120926&moc.semityn.www
*
BERLIN Germany intends to be one of the first
countries to try to put the brakes on
<http://topics.nytimes.com/top/reference/timestopics/subjects/h/high_frequency_algorithmic_trading/index.html?inline=nyt-classifier>high-frequency
trading, the computer-driven force that has been
rattling stock markets across the globe.
Chancellor Angela Merkels government approved
draft legislation on Wednesday that foresees
imposing additional controls on such trading.
The proposed measures include requiring that all
high-frequency traders be licensed, requiring
clear labeling of all financial products traded
by powerful algorithms without human
intervention and limiting the number of orders
that may be placed without a corresponding
trade. Traders who violate the limits, which
would be set once the law took effect, would face a fine.
Computer-generated algorithmic transaction
involves a variety of new risks, Germanys
finance ministry said in a statement. Germany
is reacting to these risks with legislation that
will create more transparency, security and a better overview.
The legislation, which is subject to approval by
both houses of Parliament, was written with an
eye toward similar legislation being discussed
in Brussels that could eventually apply across
the European Union, which has 27 member nations, the official said.
Steps to pass the broader legislation on
high-frequency trading are expected to proceed
Wednesday, when the influential Committee on
Economic and Monetary Affairs of the European
Parliament will vote on how to update the law
that governs securities trading to take account of new technologies.
The Europeans are not alone in their concern
about high-speed computerized trading, which has
led to several notorious market disruptions in recent years.
The latest occurred in early August in the
United States, when problems with newly
installed software caused the Knight Capital
Group, a New Jersey broker that specializes in
computer-driven trading, to lose $440 million.
The problem led Knights computers to rapidly
buy and sell millions of shares in more than 100
stocks for about 45 minutes after the markets
opened on a Wednesday. Those trades pushed the
price of many stocks up, and Knight lost money
when it had to sell the shares back into the
market at a lower price the next day.
The Knight episode raised alarms on Wall Street
and in Washington, but no new curbs have yet
been proposed for high-frequency trading in the United States.
In Berlin, German officials have acknowledged
that the technological advances of recent years
have led to irrevocable changes in the nature of
trading and that the fast pace must be accepted.
By adopting tighter controls, they say they hope
to protect the interests of all market participants.
The German draft legislation is deliberately
arranged so that the Finance Ministry has the
capability of making things more precise through
provisions, and the stock markets are required
by the law to be aware when the next trick from
high-frequency traders pops up, said a German
government official who spoke anonymously on Tuesday.
While high-frequency trading firms are unlikely
to welcome tighter rules, Deutsche Börse, the
main German stock exchange, based in Frankfurt,
said it would welcome the greater supervisory
powers that regulators would have under the proposed law.
It is good for all parties acting on the German
financial market that we now have legal
certainty how to deal with high-frequency
traders, the exchange said last week.
The European legislation under discussion, if
approved in committee, is expected to become the
basis for talks between representatives from the
European Parliament and individual governments.
Upon completion of that process, the draft
measure would need the approval of the full
European Parliament and all 27 of the European
Unions members before becoming law.
The legislation would seek even tighter controls
on fast trading than the German proposal. Among
the most closely scrutinized aspects of the
European measure are rules aimed at limiting the
ability of algorithm-driven trading to
exaggerate volatility in financial markets.
Markus Ferber, the lawmaker appointed by the
European Parliament to report on the proposal,
has recommended including rules to slow trading
by a half-second, require all trading venues to
institute ways to halt trading immediately and
make it more expensive for traders to cancel large volumes of orders.
Those rules were needed to curb mere volumes
brought by high-frequency trading and to
restore genuinely liquid, orderly and fair
markets, said Benoît Lallemand, a senior
research analyst at Finance Watch in Brussels.
Only such markets can serve the real economy.
Mr. Lallemand said he expected the committee to
approve Mr. Ferbers recommendations on
Wednesday. The focus then should be that
governments come up with an equally ambitious
proposal, he said, though he said the
legislation still could be watered down.
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Keith Hudson, Saltford, England http://allisstatus.wordpress.com
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