High-frequency trade has its ups and downs

While high-frequency trading has benefits, it caninvolve serious risks to both traders and the market as a whole.

High-frequency trading presents clear benefits for companies but it can also involve serious risks, not only to traders' investments but to entire markets.

In the Flash Crash of May 6 this year, stocks on the Dow Jones Industrial Average plunged 998.50 points, or 9.8 per cent, in a matter of minutes before quickly swinging in the opposite direction.

The swift drop left nerves frayed on Wall Street and sparked an inquiry by the US Securities and Exchange Commission, which traced the damage to a failed trade by a Kansas mutual fund.

But that one failed trade caused powerful algorithms to spark a market meltdown before human traders knew what was going on.

Those hearings led to the creation of "circuit breakers" that halt trading activity on a single stock in the Standard & Poor's 500 or Russell 1000 indexes if there is more than a 10 per cent movement in either direction within five minutes.

Since the Flash Crash, circuit breakers have been triggered by price surges in the stock of Citigroup, Plantronics and the Washington Post Company.

Given the immaturity of local markets, Saad al Chalabi, an institutional investor at AlRamz Securities, says a move to high-frequency trading may be "a step too far ahead for them" at this time.

But Mr al Chalabi says: "It helps the retail guys because it provides them more liquidity when you need it, and liquidity is risk."

Thomas Peterffy, of Interactive Brokers, says with the high-frequency genie now out of the bottle, "it is neither possible nor desirable to go back and disallow it.

"High-frequency trading will continue to increase as long as money can be made by doing it and regulators allow it," Mr Peterffy says.