Its time to ban high frequency trading

High-frequency traders have roughly tripled their stock trades this month, estimates Tabb Group, a markets-research firm in New York. That has boosted their share of overall U.S. stock trading volume to about 65%, up from about 53% during the months before the August turmoil, according to the research firm.

That increase has come amid unusually heavy trading; on Aug. 8, as the Dow Jones Industrial Average sank 635 points, New York Stock Exchange composite volume saw its fourth-biggest trading day on record.

On that same day, high-frequency traders made record profits of about $60 million in U.S. stock markets alone, Tabb estimates. That doesn't sound like a huge amount in the context of global markets, but that daily profit—while likely not sustainable, analysts and traders say—would translate into an annual gain of about $15 billion.

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Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

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High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

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In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.