As the discussion over Michael Lewis's shocking revelation last Sunday continues to escalate after he declared that the markets are utterly rigged due to High Frequency Trading (HFT), entrepreneur and business owner Mark Cuban on April 1 injected another facet to the debate that may end up be much bigger than what the computer based algorithmic paradigm known as Wall Street has evolved into. Besides the fact that HFT is for all intensive purposes a tax on investors desiring to make trades in the market, the bigger issue, and perhaps greatest fear, is that these programs have the potential to crash the entire market through an overload of the system's programming, and create one or more flash crashes that would be very difficult to repair.
High Frequency Trading (HFT) has been in operation since 1999, and the end of the Dot Com boom. However, after the credit crisis and stock market crash of 2008, HFT has increased in volume and is now estimated to entail nearly 75% of all transactions made on several market exchanges. In fact, it was primarily after the Glass-Steagal act was repealed under the Clinton Administration that investment banks began to use HFT to trade in their own assets and equity desks, many times in opposition to the very clients they sold trading information to.
Additionally, the phenomenon of flash crashes is not new, and has occurred several times since 2008 in the Dow, Nasdaq, COMEX, and even in the Japanese bond markets. In each of these cases, the exchange was forced to shut down, and quite often, go back and adjust or negate trades that took place due to a breakdown in the algorithm that front ran the trade.
Knowledge of HFT, and manipulation of the markets by the major brokers is not new, but it was only after Michael Lewis broke the industry's silence, and pulled back the curtain, that suddenly the process is being addressed by the public and the mainstream. However, since the SEC has known of HFT for many years, and has chosen to keep it a legal form of price fixing, it is unlikely that any major changes will talk place to address the process since it has in many cases, allowed banks like Goldman Sachs and J.P. Morgan Chase to go entire years without making a losing trade.