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TheStreet Open House

High Frequency Traders Love a Good Flash Crash

BATS IPO debacle emboldened the high frequency trading exchange - it seems - instead of pulling equity traders from the glitch-prone electronic trading system. Such is the world of stocks since a May 2010 flash crash - precipitated by high frequency exchanges -- which caused some of the largest market swings in U.S. history.

The original May 2010 flash crash caused U.S. stocks to tumble, pushing down the benchmark Dow Jones Industrial Average by about 1,000 points, or about 9%. Stocks recovered shortly afterward.

With this context in mind, investors should expect little out of the SEC and continued equity trading market share gains for high frequency traders, as true investors retreat from stock markets.

The SEC instead will likely emphasize 'circuit breakers,' which can minimize the impact of trading blowups, without addressing the larger problem of system-wide issues with high frequency trading. In June, the SEC approved a rule to provide new safe guards for wild and unexplained swings in the trading of U.S. stocks - however the new procedures will be implemented on a one-year 'pilot' basis starting in February - little consolation for those who may have unnecessarily lost money on Wednesday.

At Wednesday's market open, Knight Capital said that its market making operations were impacted by technical errors, causing problems in the routing of nearly 150 stocks to the New York Stock Exchange. That routing error appears to have caused a wild market open and the halting of trading in Corelogic (CLGX), China Cord Blood (CO), Kronos Worldwide (KRO), Trinity Industries (AAPL) and Molycorp (MCP - Get Report).

In addition, the stocks of Goodyear Tire & Rubber (GT), Manitowoc (MTW - Get Report) and Pandora Media (P - Get Report) surged over 10% at the open, while Level Three Communications (LVLT) fell 15%, on the irregularity.

The wild swings are thought to result from a flood of computer-generated high-frequency trades, which flooded the market. Trading on some of the biggest companies -- including Radio Shack (RSH), and Dole Foods (DOLE) -- were also affected.

The New York Stock Exchange said it would cancel stock trades that in six companies that reflected moves in excess of 30% between the market open and 10:15 a.m. Those stocks include Wizzard Software Corporation (WZE), China Cord Blood (CO), China Cord Blood, E-House (China) Holdings (EH), American Reprographics (ARC) and Quicksilver Resources (KWK).

"An initial review by Knight indicates that a technology issue occurred in the company's market-making unit related to the routing of shares of approximately 150 stocks to the NYSE," said Knight, in an emailed statement obtained by Bloomberg. "Knight notified its market-making clients this morning to route listed orders away," according to the statement.

All things told, while Knight Capital shares - which were also hit from losses stemming from Facebook's (FB - Get Report) botched IPO - may take time to recover, don't expect any significant regulatory action or market changes from Wednesday's trading problems.

" You may get some blue-ribbon panel to put out a report in five months, but nothing will get done," said Joseph Saluzzi, a co-founder and co-head of equity trading at Themis Trading, in an earlier interview with TheStreet.

-- Written by Antoine Gara in New York

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