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High-frequency trading has been the subject of intense public focus since regulators claimed these practices contributed to volatility on May 6, 2010, popularly known as the 2010 Flash Crash,[9][10][11][12][13][14][15][16] a United States stock market crash on May 6, 2010 in which the Dow Jones Industrial Average plunged to its largest intraday point loss, but not percentage loss,[54] in history, only to recover much of those losses within minutes.[55] Another area of controversy, related to SEC and CFTC findings in their joint report on the Flash Crash that equity market "market makers and other liquidity providers widened their quote spreads, others reduced offered liquidity, and a significant number withdrew completely from the markets"[51] during the Flash Crash, is whether high-frequency market makers should be subject to regulations that would require them to stay active in volatile markets.[56] As SEC Chairman Mary Schapiro said in a speech on September 22, 2010, "...high frequency trading firms have a tremendous capacity to affect the stability and integrity of the equity markets. Currently, however, high frequency trading firms are subject to very little in the way of obligations either to protect that stability by promoting reasonable price continuity in tough times, or to refrain from exacerbating price volatility."[57]
Despite studies reporting positive findings about high-frequency trading, including that high-frequency trading reduces volatility and does not pose a systemic risk,[7][36][35][49] and both lowers transaction costs for retail investors,[37][36][35] and at the same time does so without impacting long term investors,[2][7][35] high-frequency trading is the subject of increased debate.[58] This debate has been fueled by U.S. Securities and Exchange Commission and Commodity Futures Trading Commission empirical findings that high-frequency trading contributed to volatility in the May 6, 2010 Flash Crash.[9][10][11][12][13][14][15][16] Politicians, regulators, journalists and market participants have all raised concerns on both sides of the Atlantic.[23][58][59] In September 2010, SEC chairperson Mary Schapiro signaled that US authorities were considering the introduction of regulations targeted at HFT, such as a minimum "time in force" rule, to prevent buy orders being canceled very soon after being issued. Criticisms of this proposed law are that currently exchanges allow excess message traffic to queue up at their servers' ports, where it is processed sequentially at a fixed rate and as a result poses no threat to the exchanges.[7] In addition to this, equity options markets produce far more message volume than equity markets and have consistently handled the data without issue.[7] Some HFT systems cancel many of their orders almost immediately after placing them as they don't intend the trades to carry through; the false orders are used as part of a pinging tactic to discover the upper price other traders are willing to pay.[58] Some high-frequency trading firms state that so many orders get canceled because the orders people get are not the same ones they send. This happens frequently because of an existing regulation regarding re-priced orders.[7]
Another area of concern relates to flash trading. Flash trading is a form of trading in which certain market participants are allowed to see incoming orders to buy or sell securities very slightly earlier than the general market participants, typically 30 milliseconds, in exchange for a fee. According to some sources, the programs can inspect major orders as they come in and use that information to profit.[5] Currently, the majority of exchanges either do not offer flash trading, or have discontinued it, although the exchange Direct Edge currently does offer it to participants. Direct Edge's response to this is that flash trading reduces market impact, increases average size of executed orders, reduces trading latency, and provides additional liquidity.[60] Direct Edge also
