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More than a "glitch"

By Miriam DiemerFlickr by Mike Licht

“Hot potato,” “flash-crash,” “algos” and “big board” are just a few of the childlike terms used to discuss the immensely complicated world of computerized trading.  But don’t let the unsophisticated language fool you – the industry and its practices are esoteric at best.

And maybe that’s why these high-frequency trading companies have been able to manipulate our financial markets  Computerized trading is a relatively new phenomenon, but the problems it has already generated in the financial market – the May 6, 2010, flash-crash that caused one trillion dollars to momentarily vanish, the August 1, 2012, Knight Capital algorithm “glitch” that caused massive fluctuations for 150 stocks – prove it isn’t going to regulate itself.

High-frequency traders pay exchanges for quicker access to information. And in the milliseconds before information is available to traditional investors, the high-frequency traders will already have released their “algos” or algorithms on the system in order to prey on mutual and pension funds. This market manipulation causes artificially high prices, market “flash-crashes” and a pervading distrust of the system.

The U.S. Senate Banking subcommittee on securities, insurance and investment held a hearing last week to talk about the “rules to the road” in computerized trading. Public Citizen’s Micah Hauptman submitted testimony urging the passage of the Wall Street Trading and Speculators Tax Act, which would charge a miniscule tax (.03 percent) on market transactions. Such a small amount would have a negligible effect on traditional investors, but could generate billions from these high-frequency traders – enough to improve regulatory supervision of trading activity and market abuses.

The bill, S. 1787 and H.R. 3313, introduced by U.S. Sen. Tom Harkin (D-Iowa) and U.S. Rep. Peter DeFazio (D-Oregon), has been sitting in committee since late last year.

Miriam Diemer is Public Citizen’s communications office intern.