3c hapter - Index of

Back to the Future 207
are programmed with sophisticated algorithms to buy and sell stocks
in rapid- fi re succession. The goal is to take advantage of small price
differentials that exist for fractions of a second (think day traders on
silicon steroids). These robotrades now account for at least 60 percent
of all trading activity—the trading equivalent of spam.
The practice is so lucrative and the trading speeds so fast
that high- frequency traders, from Goldman Sachs to privately
held GetGo LLC, pay the New York Stock Exchange tens of thousands
of dollars a month to “colocate” their black boxes in the
exchange’s new electronic data center in New Jersey. The coupleof-
millisecond advantage that physical proximity buys allows the
robotraders to sniff out and act on data before anyone else has
a chance to see it. For its part, the NYSE hopes colocation opportunities
will help it win back trading business that has shifted to
the “dark pools,” where institutional investors can anonymously
buy and sell large blocks of shares.
The robotraders say they are doing a service by increasing
liquidity so that there is always a ready market for stocks. Critics
accuse them of “ front- running,” or jumping ahead of other
trades, and distorting the markets by fl ooding the system with
faux buy and sell orders—in other words, cheating. At best, there
is little social utility to these high- frequency trades. At worst, the
algorithm- based black boxes can behave in unpredictable and
dangerous ways. It’s one thing to have a computer fi ring off zillions
of trades a second, but multiply that times hundreds of computers,
and you’re talking serious potential for chaos.
Exhibit A: the fl ash crash of May 6, 2010. On an otherwise
slow afternoon, the market suddenly began an alarming drop.
The Dow Jones Industrial Average plunged more than 600 points
in a matter of minutes, only to quickly recover. It took months
to pinpoint the cause: the sale of $4.1 billion worth of futures
contracts by a Kansas mutual fund. As high- frequency trading
programs kicked in, the contracts changed hands an astonishing
27,000 times in 14 seconds—or almost 2,000 trades a second. 14
Once again, regulators are scrambling to keep pace with Wall
Street “innovations.” (And the innovators are trying to buy their
way out of regulation: High- frequency trading fi rms contributed