Wall Street Robots Have Taken Over The Market, Horrifying GIF Shows

Jason Blatt of Knight Capital Americas, LP reacts to down market on the floor of the New York Stock Exchange August 8, 2011.
Jason Blatt of Knight Capital Americas, LP reacts to down market on the floor of the New York Stock Exchange August 8, 2011. US stocks plummeted more than five percent on Monday, with the Dow Jones Industrial Average losing 625 points in the wake of Standard & Poor's unprecedented downgrade of the United States. The Dow was down 5.5 percent to 10,813.26 in closing trade, its lowest close since last October, while the broader S&P 500 fell 6.6 percent and the tech-heavy Nasdaq dropped 6.9 percent. AFP PHOTO / Stan HONDA (Photo credit should read STAN HONDA/AFP/Getty Images)

This is what it looks like when the robots take over the stock market.

The GIF, courtesy of market research firm Nanex, by way of Felix Salmon and ThinkProgress, shows the rapid rise of high-frequency trading in the past few years. It takes a while to get to the climax, but the fireworks display at the end is worth the wait.

Along the horizontal axis are the hours in the market day. Along the vertical axis is the volume of high-frequency stock trading on various exchanges, which are color-coded. As you can see, high-speed trading was almost non-existent in 2007, but has completely blown up and overwhelmed the stock market in the past few years.

This is great news, say advocates of high-speed-trading robots. They argue that all of this trading has made it easier and cheaper to buy and sell stocks. Companies and investors make more money because the market flows more smoothly. Exchanges and brokers make more money because there's more trading. Everybody wins.

Except occasionally, by which I mean constantly, there are horrific blowups that cost firms millions of dollars. Knight Capital, whose high-speed trading robots cost it $440 million in a half an hour, is only the latest. And these blowups have significantly contributed to investors' crumbling confidence in financial markets. In fact, they have been the biggest contributor, according to one survey.

New York Times columnist Andrew Ross Sorkin slobber-argued in a column on Tuesday that high-speed trading isn't to blame for making everybody hate the stock market. We should be very careful about regulating it, he says, lest we lose all the benefits of high-speed trading:

So for now, it seems, trading firms don't just need to throw out their electronic trading systems or bring in more regulators to oversee their stock executions. They need the country to get a shot in the arm to address its economic problems, and they need the public to have faith in the long term.

Instead of pointing the blame at one incident or another, look at the fundamentals.

Francesco Guerrera at The Wall Street Journal agrees with Sorkin, in a Tuesday column of his own:

More draconian speed limits, however, almost certainly would result in higher trading costs, longer execution times and a loss of business to other, nimbler market places outside the U.S.

These warnings against the horrors of regulation seem to have been taken straight out of the Chamber of Commerce manual for arguing against regulation. They ring hollow, considering how sluggish the economy has been during the rise of the machines. The stock market has bounced back from its rock-bottom during the crisis, but how much can we say high-speed trading contributed to that bounce? Can anybody really argue with a straight face that the economy and financial markets would be in noticeably worse shape right now without high-speed trading?

Maybe we can't, or shouldn't, eliminate high-speed trading altogether. But we also can't rely on the free market to maintain order, as even the paramedics mopping up the Knight Capital disaster suggest. The free market has let trading continue to get out of control despite the Flash Crash, the Facebook IPO and a flurry of other market debacles.

One possible answer is, as Salmon suggests, a transaction tax. The U.K. has one, without doing any noticeable damage to its stock market. Such a tax has been proposed in the U.S., and Europe is moving toward adopting one, though not every country there agrees.

The United States actually had a transaction tax from 1914 to 1966. It didn't prevent bubbles and busts, but it didn't stop the stock market from soaring in value after World War II either.

However we do it, there's got to be a better way than just letting the robots run wild.