Business

Time for regulators to rage against machines

Where did individual investors go? They are taking their portfolios and going home. And who can blame them?

At 3:59:57 on Tuesday, the Dow Jones industrial average saw a 24-point move lower, three seconds before the close. The trade had a notional value of $6.2 billion in future S&P contracts. The size of this trade in the last moments of the month was larger than the initial trade that caused the Flash Crash in May 2010.

But that flash trade perhaps could be attributed to window-dressing the month. Wednesday morning, nothing appeared amiss until the opening bell. That’s when a Knight Capital trading program went rogue, sending out erroneous trades on more than 140 listed companies.

It’s perfectly within their rights for Main Street investors to take their funds and go. And more and more will go, once they realize that this field isn’t just tilted against them, it’s turned over on its side.

As if that weren’t enough abuse of Main Street investors, firms such as Knight Capital have data and trading computer servers on-site at the exchange server-farms in New Jersey. This allows for the Knights of the world to beat other investors to the trade by milliseconds, which is all you need to collect a few pennies on each share.

Do that more than 10 million or 20 million shares a day, and you have a tidy profit for these high-frequency trading operations. For certain, some things need to be done.

First would be the reinstatement of the “Uptick Rule,” which would be a great way to slow things on the down side. There is not a legitimate or bona fide argument against it.

Since its removal, at the behest of short-sellers on June 6, 2007, the market has certainly been more volatile and a lot less liquid, to say the least.

The Uptick Rule refers to a trading restriction that disallowed short selling of securities except on an uptick or higher price. In crashes and corrections, short selling algorithms can more easily manipulate the market into a distorted state.

Second, no firm trading its own capital should be permitted to have its computer servers on-site at any exchange.

But as of now, individual-investor morale is certainly damaged. The irony here is that humans control some of the solutions to “Robots Gone Wild.”

Regulators should rage against the machines, implement the Uptick Rule and kick the bots out of the stock exchanges’ server farms.

Standing in the way of technological progress, with all its fits and starts, is never productive. Washington applying some common sense would be.