Stock Markets: Should Wall Street Slow Down?

by Elaine Schwartz    •    Aug 2, 2012    •    249 Views

Soon after the New York Stock Exchange (NYSE) opened yesterday, the prices of more than 140 securities moved irrationally. Some were up 150%. Though no one yet has said why, we do know that fast trading computer programs—high-frequency trades—were the source.

In his book, Wait: The Art and Science of Delay, Frank Partnoy, tells us why we had a problem. Partnoy, a former investment banker and current professor of law and finance says that, “…in most situations we should take more time than we do. The longer we can wait, the better.”

In a chapter on “Superfast Sports,” he explains how Jimmy Connors and Chris Evert were unusually fast at physically responding to a speeding tennis ball. Their rapid physical response gave them more time to think beforehand.

Reading Partnoy’s chapter on high-frequency trading, I thought about stock market history. Since Wall Street’s first traders gathered under a buttonwood tree to buy and sell securities, the time to think has decreased. The onset of the telegraph, the ticker tape, and the telephone sped and spread the pace of transactions. Then, during the 1990s, computers began to handle more orders.

You can see where we are going. Technology accelerates the speed of orders and diminishes “thinking time.”

Today, we have reached the point where people need not interact directly when they buy and sell securities. Representing 70% of US stock trades, high-frequency trading transactions among computers occur in milliseconds. Partnoy suggests that even in a millisecond world of demand and supply, as with Connors and Evert, slight delays could benefit all participants.

And that returns us to yesterday’s “glitch.” Is delay a part of the solution?

This Reuters article and the Washington Post discuss high-frequency trading problems.

Please note that content was edited after posting.

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