SEC mulls fees for high-speed traders

High-speed computers dominate stock trading. But they cancel so many transactions that the SEC wants to fine them for “speeding.” Here, a stock trader reads a graph on the floor of the New York Stock Exchange at the closing bell on Feb. 21, 2012 in New York City.

Kai Ryssdal: We've talked before on the program about all the computers that do battle in the stock market every day, chasing fractions-of-a-penny differences in share prices. High-frequency trading, as it's known, now accounts for as much as half of all the shares that change hands in the U.S. stock market on any given day.

And that has regulators worried it might also be creating wild market swings, an uneven playing field and the potential for price manipulation. Here's our senior business correspondent Bob Moon.

Bob Moon: Here's how fast you can buy a stock and then turn right around and unload it these days:

Fingers snapping

High-frequency firms can make thousands of trades in a snap. They blanket the market with pending orders, so they can jump on split-penny price differences with lightening speed -- but by one estimate, they cancel up to 97 percent of those buy and sell orders. Federal regulators worry that's creating arbitrary price swings, so they might start making high-frequency traders pay fees for all their canceled trades.

At the Tabb Group, though, market researcher Larry Tabb argues that high-frequency trading doesn't necessarily skew stock prices over time.

Larry Tabb: You know, at the end of a one-minute, five-minute period, what they've bought, they've sold. So it really doesn't much impact the longer-term price of these stocks.

Adam Honoré is a market researcher at Aite Group. He cautions that regulators could chase high-frequency traders away, and the loss of that business could make trading more expensive for everyone.

Adam Honoré: Remember back in the "dot-com" heyday, when we were paying 20 and 30 bucks a trade, and now we're paying $7 a trade. I mean, where do you think that comes from? That's no magic, that's people supplying liquidity into the market, and technology and innovation into the market.

Honoré says regulators could better spend their time on other priorities. But former Sen. Ted Kaufman -- an outspoken critic of high-frequency trading -- says this issue needs to be a priority.

Ted Kaufman: The fact that we could have another financial meltdown like we had during the dot-com thing, or we had during the financial crisis -- there'll be nobody left in our markets.

Kaufman says a level playing field is essential to restoring faith in the market.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.
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The "Flash Crash" of 2008 immediately comes to my mind. Why wasn't that discussed during this interview?

High Frequency Trading could be throttled by taxing really short term capital gains at an exponentially higher rate than normal. I don't think the SEC can successfully regulate these people, but might as well get some revenue from it.

I don't buy the reasoning that the price of trades have gone down because of high frequency trading. High frequency trading has added a burden to the trading system, which should result in the costs going up. Having a fee per offer sounds like a great idea. It might result in Wall Street being able to pay the country back for ruining our economy.

I was appalled by Marketplace’s anemic criticism and tacit acceptance of so-called “high-frequency trading”, which now represents upwards of 50% of the volume of all stock trades. This practice corrupts and bastardizes the whole reason for buying equities in the first place. It used to be that you bought stock in a company because you believed their product or services were superior and were going to grow or because they paid a handsome dividend. To allow these Wall Street firms to arbitrage minor, temporary differences in a stock’s price is to game the system and turn the market into nothing more than a casino, rigged in favor of the big boys. The fool who stated that high-frequency trading is responsible for bringing the cost per trade down from $20 to $7 is an idiot. I would gladly pay more per trade to know the system wasn’t being manipulated by dishonest computer wizardry. High-frequency trades should be taxed heavily and regulated out of existence! It is the antithesis of “the free market”.

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