02/23/2012 01:39 pm ET

Flash Trading Gets New Scrutiny By Regulators

Regulators are taking a hard look at the Wall Street practice known as flash-trading. According to the Wall Street Journal, the chairman of The Securities and Exchange Commission, Mary Schapiro, said yesterday that she is considering instituting new fees on many high-speed stock and bond trades.

Flash-trading - a practiced favored by some hedge funds - is the ultra-fast purchase or sale of securities, usually executed with the help of advanced computer technology in a matter of milliseconds. It is designed to give the financial institutions that employ the practice a leg up over the rest of the stock market by trading securities very quickly and exploiting miniscule changes in stock prices.

But the practice can be perilous, since real people are often left out of the computerized trading process. “During the trade you can’t intervene,” Neil Johnson, a professor at the University of Miami who studies flash trading, told The Huffington Post. “If [a person] saw the big picture, they’d never make some of the choices,” the computers are making.

Most recently, high-speed trading led to the so-called "flash crash" in 2010 when the Dow Jones Industrial Average tumbled by 1,000 points in a matter of minutes after a series of automated high-speed trades prompted a massive stock sell-off (the market recovered its losses by the end of the same day).

Less than a year earlier, the SEC had proposed an all-out ban on the practice, though no action was ultimately taken.

According to the Journal, during the roundtable discussion with reporters yesterday, Schapiro is reported to have said that flash trading was a “worry,” and that the high-speed purchase or sale of stock in a given company often bears little relation to the actual market value of that company.

Schapiro’s comments come amidst a renewed interest among international regulators in high-speed trading as well. This past December, The European Securities and Markets Authority gave financial institutions that engage in the practice four months to implement checks that monitor such activities, according to The Financial Times. Curbs would include mechanisms for constraining the number of trades in times of high high-speed purchase or sale volume, according to the FT.

The University of Miami's Johnson released a study this week demonstrating that fluctuations in the flash-trading market anticipated the financial crisis. His data show that in the run-up to the stock market crash of 2008 there were a series of mini-crashes in the high-speed trade market that essentially foreshadowed the broader market tumble.