Commentaries

Wall Street meets The Matrix

Michael Durbin is no Wall Street rebel. But Durbin, who has been on the front lines of high-frequency trading (HFT) since its early days, isn’t afraid to buck the industry line that lightning-fast trading of stock, options and commodities poses little or no risk to the stability of the markets.

Durbin says it’s reasonable to wonder whether Wall Street’s unfettered embrace of algorithmic automated trading could be setting the stage for a future meltdown.

“You have multiple HFT trading firms and sometimes their agendas are complementary and sometimes they’re not,” explains Durbin, director of HFT research with Blue Capital Group, a small Chicago-based options trading firm.

“There could be a time where these HFT programs unintentionally collaborate and you have a two- or three-minute period where the markets are going crazy. Then other traders respond to it and it simply gets out of control.”

What Durbin’s talking about is the dreaded contagion effect, in which a bad trade or a rogue algorithm misfires — sparking copycat sell orders at other high frequency desks.

It’s the kind of machine-driven crash that sounds like the plot line for “Wall Street” meets “The Matrix”.

High frequency trading programs are designed to scour the markets to decipher trends in trading patterns and place buy and sell orders a millisecond ahead of the pack. It all happens at warp speed, and except for developing the algorithmic programs, the human element is all but gone from the equation.