Featured Research

from universities, journals, and other organizations

How laws need to change to catch up with algorithmic stock trading

Date:
April 29, 2014
Source:
Vanderbilt University
Summary:
High speed algorithms have so revolutionized the design and functioning of our stock markets that they are fast tearing up the rule book in how these markets are regulated, according to a researcher.

High speed algorithms have so revolutionized the design and functioning of our stock markets that they are fast tearing up the rule book in how these markets are regulated, according to a Vanderbilt Law School researcher.

Related Articles


"Algorithms able to execute tens of thousands of trades in just fractions of a second are responsible for more than 70 percent of all equity trading volume in the United States," said Yesha Yadav, assistant professor of law at Vanderbilt Law School. "Securities regulation has not kept pace with this profound transformation underway in public markets."

Many of our most basic securities laws depend on prices to reflect available information in the market. But, high-speed algorithmic markets are transforming how this information is received and processed in the market. It is not just a matter of the extraordinary speeds at which algorithms can trade, but more importantly, in the amount of control that human traders have to review and correct errors in information flows. Although algorithms are making markets extremely fast at reacting to news, we have also seen instances of markets going haywire when algorithms trade on the back of incorrect or over-hyped information received through Twitter feeds or the news media, Yadav argues in "Beyond Efficiency in Securities Regulation," a recent working paper made available on SSRN.

"More problematically, traders also benefit where their algorithms deploy strategies that confound other market participants, or that make it more difficult for others to trade," Yadav writes. "Sending out false signals through dummy trades, or flooding the market with inexplicable but canceled orders can disrupt information flows to the benefit of the strategic algorithmic trader."

One possible consequence to the prevalence of algorithmic stock trading may be that some traders will opt out of the system and take their assets elsewhere, feeling they cannot compete. The market relies on fundamentally informed traders to provide high-quality insights into what prices mean. But, where informed investors systematically lose to their computerized counterparts, they may eventually lose the incentive to take full part in the market, or they may invest less in research. This impact might not be obvious today. However, as markets develop and evolve, it is a pressing question for the next 5 years.

"Automated markets have little respect for traditional paradigms that have governed markets over the last half-century," Yadav writes. "As markets change, so must the laws and theories that regulate them. Without this, regulation must become a bystander to the inevitability of innovation."

Yadav, who worked as legal counsel with the World Bank before joining Vanderbilt's law faculty in 2011, researches international finance and securities regulation, notably with respect to the evolving response of regulatory policy to innovations in financial engineering, market microstructure and globalization.


Story Source:

The above story is based on materials provided by Vanderbilt University. Note: Materials may be edited for content and length.


Journal Reference:

  1. Yesha Yadav. Beyond Efficiency in Securities Regulation. SSRN Electronic Journal, 2014; DOI: 10.2139/ssrn.2400527

Cite This Page:

Vanderbilt University. "How laws need to change to catch up with algorithmic stock trading." ScienceDaily. ScienceDaily, 29 April 2014. <www.sciencedaily.com/releases/2014/04/140429125508.htm>.
Vanderbilt University. (2014, April 29). How laws need to change to catch up with algorithmic stock trading. ScienceDaily. Retrieved February 27, 2015 from www.sciencedaily.com/releases/2014/04/140429125508.htm
Vanderbilt University. "How laws need to change to catch up with algorithmic stock trading." ScienceDaily. www.sciencedaily.com/releases/2014/04/140429125508.htm (accessed February 27, 2015).

Share This


More From ScienceDaily



More Computers & Math News

Friday, February 27, 2015

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Android's Popularity Doesn't Mean Profits For Google

Android's Popularity Doesn't Mean Profits For Google

Newsy (Feb. 26, 2015) — Seventy percent of smartphones shipped last year were Android but that OS only accounted for 11 percent of total smartphone profits. Video provided by Newsy
Powered by NewsLook.com
Lenovo Hack May Be Retaliation For 'Superfish' Vulnerability

Lenovo Hack May Be Retaliation For 'Superfish' Vulnerability

Newsy (Feb. 26, 2015) — Lenovo&apos;s website was hacked by what appears to be the infamous Lizard Squad group. The attack seems to be related to Lenovo&apos;s "Superfish" controversy. Video provided by Newsy
Powered by NewsLook.com
Google's Artificial Intelligence Can Dominate Atari Video Games

Google's Artificial Intelligence Can Dominate Atari Video Games

Buzz60 (Feb. 26, 2015) — Google&apos;s artificial intelligence, DeepMind, has figured out how to play and master a handful of Atari video games. Brett Larson explains. Video provided by Buzz60
Powered by NewsLook.com
Cyber Criminals Holding Phone and Computer Data to Ransom

Cyber Criminals Holding Phone and Computer Data to Ransom

AFP (Feb. 26, 2015) — Computer and smartphone viruses are holding an increasing number of devices hostage using “ransomware.” Duration:02:21 Video provided by AFP
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
 
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:  

Breaking News:

Strange & Offbeat Stories

 

Space & Time

Matter & Energy

Computers & Math

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:  

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile iPhone Android Web
Follow Facebook Twitter Google+
Subscribe RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins