Yet just one month after the SEC took this step, a mini flash crash occurred when Knight Capital Group Inc., whose market-making division handles about 10 percent of U.S. equity volume, lost $440 million and saw its stock plunge more than 70 percent after a “software glitch” that dumped a huge number of orders into the market. “Those kinds of things are inevitable because they’re computer programs,” Easley says. “There’s not going to be a perfect one. The question is, What are your controls?”
Several countries around the world are cracking down on high-frequency trading, most recently Australia, Canada, and Germany. But because this form of trading is still dominant in the United States, and likely to remain a key feature of the U.S. financial markets for the foreseeable future, the need for a strong indicator to keep the system in check and protect investors will only continue to grow. The debate over VPIN may be taking place largely in the ivory tower, but if the metrics of probability can truly tame the dangers inherent in computerized trading, then the potential consequences reach far beyond.
Reprint No. 00144
- Matt Palmquist is a freelance business journalist based in Oakland, Calif., and the author of s+b’s Recent Research column.