High-Frequency Trader warns of potential market disruption

Speaking to the Financial Times online, Mark Gorton, Founder & Head of Tower Research Capital, stated that while markets have become far more efficient, danger is rising out of the complexity that this new era has spawned. 

“The recent evolution of markets from manual to electronic trading has had huge benefits and investors save money every day due to the lower cost of trading. But electronic trading brings with it a number of new risks, and we need to continue to strengthen the resiliency of electronic markets,” Mr Gorton said.

Mr Gorton has underlined how failures to regulate the industry threaten to leave "a large hole in the middle of the system that needs to be filled."

Although many claim the necessary safeguards are already in place to keep control of HFT algorithms, the inherent risks of HFT came into focus in 2012 when a software glitch caused Knight Capital to lose $440m in just half an hour. 

Nasdaq and the New York Stock Exchange are two exchanges that have brought in circuit-breaker reforms since the 'flash crash' of 2010 and in doing so their actions have illustrated just how automated markets have become. But regulations need to be tightened to mitigate inevitable bugs and glitches in future, caused by malfunctioning algorithms, which could provoke trouble in the wider market, Mr Gorton feels.

"We need a regulatory framework that assumes that any single system in the market will fail and insures that we have multiple redundant levels of checks that can catch failures in other parts of the system" he commented. 

Other issues Mr Gorton alluded to included the poor centralised position-tracking tool for the US stock market, the demand to improve circuit breakers between highly correlated markets and the lack of transparency over trades deemed invalid. 

If an erroneous execution of a trade is cancelled, it is usually because an attempt has been made to trade at an obviously illogical price. However, exchanges are afforded more latitude when markets are volatile. 

According to Mr Gorton, high-speed trading can create "a situation where market participants are forced to pull back during times of extreme stress due to uncertainty about their positions due to potential trade breaks, and this weakness can contribute to a crash in the future."