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Drive the algos overseas…

The Chicago Fed has published a short paper on high frequency trading… makes you wonder how much economic activity this trading represents for the Chicago area…

The fundamental issues around high frequency trading are systemic risk and investor fairness. Unfortunately this paper doesn’t address either one of those issues…

From the conclusion of the paper “Controlling risk in a lightning-speed trading environment“, by Carol L. Clark, lead technical expert, Financial Markets Group…

~~~” …The high-frequency trading environment has the potential to generate errors and losses at a speed and magnitude far greater than that in a floor or screen-based trading environment. In addition, the types of risk-management tools employed by broker–dealers and FCMs, their customers, nonclearing members, exchanges, and clearinghouses vary; and their robustness for withstanding losses from high-frequency algorithmic trading is uncertain. Because these losses have the capability of impacting the financial conditions of the broker–dealers and FCMs and possibly the clearinghouses, determining and applying the appropriate balance of financial and operational controls is crucial.

Moreover, issues related to risk management of these technology-dependent trading systems are numerous and complex and cannot be addressed in isolation within domestic financial markets. For example, placing limits on high-frequency algorithmic trading or restricting unfiltered sponsored access and co-location within one jurisdiction might only drive trading firms to another jurisdiction where controls are less stringent…”~~~

Maybe the high frequency traders would enjoy the Cayman Islands?