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High Frequency Traders Love a Good Flash Crash

"If you strike me down, I shall become more powerful than you could possibly imagine." Obi Wan Kenobi.

NEW YORK ( TheStreet) -- Following yet another electronic stock trading blowup -- this time at Knight Capital (KCG - Get Report) -- investors may expect a withdrawal from computerized and opaque high frequency trading markets.

Think again. They are just getting started.

Although Knight Capital's shares are off nearly 33% in Wednesday trading and the Securities and Exchange Commission says that it is looking into the "technical issue" that caused the latest Flash Crash, past blowups signal that high frequency trading will continue its unremitting stranglehold over stock markets.

The trading glitch at Knight Capital -- which executed $19.5 billion of stock trades in June and is a big high frequency trading conduit to the public markets -- led to unusual reading in 148 stocks listed on the New York Stock Exchange at the open. The yet to be explained electronic trading failure mirrors many past blowups.

In March, high frequency exchange BATS Global Market failed miserably at conducting an initial public offering of its shares on its own exchange, pulling the listing after its shares opened at 3.8 cents instead of an IPO pricing of $16.

The IPO debacle was a black eye for BATS Global Markets, which hasn't refilled IPO papers and stripped its chief executive Joseph Ratterman of his chairmanship. Technical errors on BATS' high frequency exchange not only condemned its IPO, glitches also caused wild fluctuations in dozens of stocks including Apple (AAPL).

During and after the high frequency trading melee, the Securities and Exchange Commission tried to reassure investors that it was keeping a close eye on the March trading error and that action would follow if warranted. "As is our practice, SEC staff has been and will continue to be in discussions with BATS to determine the cause and extent of the incident and steps BATS is taking to remedy the situation," said SEC spokesman John Nester, at the time.

Although the March IPO dud cast serious doubt on BATS' ability to trade its shares or the hundreds that pass through its exchange daily, no public insights, inquiries, or regulations have been disclosed to investors by the SEC in the subsequent four months.

A call to an SEC spokesperson today confirmed that the regulator hasn't yet offered any policy recommendation related to the BATS blowup.

Instead, the SEC offered this statement on Knight Capital's Wednesday's trading issues: "As is our practice, we are closely monitoring the situation and in continuous contact with the NYSE and other market participants."

Sound familiar?

Meanwhile, in the intervening time since BATS' IPO debacle, trading on its exchanges have surged to new records. In May, the company reported its fourth best month on record for U.S. equities market share, with 11.7% of stock market trading. That U.S. equities market share rose to 11.5% in June, also up from year-ago levels.
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