Regulators Are Slow to Act on Speed Traders

It’s been almost two years since the “Flash Crash” of May 2010, when the Dow Jones plummeted 600 points in five minutes, only to gain most of it back over the next 20. In their after-action report (pdf) a few months later, the SEC and CFTC faulted high-frequency traders for exaggerating the sell-off with their rapid-fire trading techniques.

Since then, regulators have spoken repeatedly about their intent to crack down on speed traders, a breed of computer jockeys who use sophisticated algorithms to trade stocks and other assets in as little as 1-millionth of a second. But with the exception of some small rule changes, nothing has really changed. High-frequency trading remains today as it was two years ago: an opaque, misunderstood, and almost totally unregulated industry worth billions of dollars. Since a lot of high-frequency trading firms are small shops trading for themselves, rather than banks or brokers, they fall into a regulatory black hole that financial watchdogs have struggled to fill.