SEC mulls fees for high-speed traders

Bob Moon Feb 23, 2012

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.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.