The Securities Exchange Commission (SEC) released a draft of its 2014 Strategic Plan for public comment. The plan is technical, but the motivation is straightforward: increase investor confidence in our markets. This is a critical goal, and regulators and the industry alike must work together to achieve it.
It’s hard to think of a sector that hasn’t been improved dramatically by information technology, and Wall Street is no exception. Today, ultra-fast computers and advanced algorithms execute hundreds of transactions in fractions of a second. In 2005, high-frequency trading (HFT) accounted for 21 percent of trades in U.S. equities. In 2012, that figure had more than doubled to 51 percent.
Long gone are the days when traders crowded exchange floors to make markets—and that’s a very good thing for the average investor. Here’s why:
The proliferation of HFT has democratized the marketplace in profound ways. Fierce competition between market participants means far better price discovery and stability. Automation has lowered the cost of executing and clearing trades, with broker commissions tumbling from upwards of $70 per trade in 1997 to less than a dollar today. The time it takes for critical information to reach investors has also decreased. And in a fully digitized marketplace—where every order, quote, and trade is electronically stored and easily audited—every thing is more transparent.
