Speed trading threatens Terminator event

The buying and selling of shares by computers has frightening implications, writes David Potts.

The buying and selling of shares by computers has frightening implications, writes David Potts.

'Dark pools" sounds like something particles whizzing around the Hadron Collider at almost the speed of light might find.

If only. Fact is they are a by-product of something more sinister: speed trading, where computers initiate, uh interface, share trades with each other so fast that if you blink you've missed 150 of them.

If it's possible to travel faster than the speed of light, these computers will be the first to know.

Not that they'll tell anybody. The problem with speed trading is nobody, least of all the ASX or Australian Securities and Investments Commission (ASIC), knows what the computers are up to.

There's no human intervention, apart from the design of the algorithms in the first place. From there, the computers are on their own and can run rampant with a faulty algorithm until somebody pulls the plug, invariably too late.

Remember the "flash crash" two years ago, when Wall Street dropped 1000 points in 20 minutes? Speed trading. Even scarier, it's spread to commodities and, gulp, derivatives, bringing wild price fluctuations with it.

A Wall Street trader, Knight Capital Group, recently blew $440 million in an hour as its computer went haywire - distorting the prices of 150 stocks in the process - and nearly went under.

And what if it had? Good riddance you say - only that could have been another Lehman moment. It was the collapse of the non-collapsible Lehman Brothers that pushed the global financial system to the brink.

Yet speed trading is encouraged by the ASX, which happens to earn a fee for every quote, so a few more million sure won't hurt it.

Trouble is, the computers are trading with each other for starters.

Besides, the computer programs vault to the top of the queue because they know your order before the ASX's computer does and, the way things are going, I dare say even you. They'll undercut a seller and overbid a buyer to get in first. Cripes, they can beat you even at the same price.

Or they're flooding the market with fake bids, suggesting something's happening and there's momentum, only to cancel them a nanosecond before the market opens. That's called manipulation and would land a broker who tried it in jail.

This is pushing more trades off the exchange into dark pools owned by banks and brokers, which has the ASX whingeing to ASIC.

Still, it says dark pools are the antithesis of what a sharemarket should be about - transparency and a level playing field. While ASIC and ASX are sending papers to each other on how to control dark pools, the cause of them - speed trading - is accelerating, so to speak.

What scares me is that they've already lost control and don't even realise it.

Follow David on Twitter @moneypotts

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