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Originally published May 24, 2010 at 8:58 PM | Page modified May 25, 2010 at 9:58 AM

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Speed-addicted traders dominate today's stock market

The cramped computer room in an office building overlooking the Harbor Freeway can't match the color and tradition of the New York Stock Exchange.

Los Angeles Times

LOS ANGELES —

The cramped computer room in an office building overlooking the Harbor Freeway can't match the color and tradition of the New York Stock Exchange.

No traders, opening bell or operatic din. Just floor-to-ceiling racks of Dell and Hewlett-Packard computers spitting out a monotonous drone. The only people passing through are janitors and the occasional programmer or electrician.

But while the NYSE remains the cynosure of the global markets, much of the world's stock trading emanates from drab computer rooms such as this one in downtown Los Angeles, or in outposts such as Kansas City, Mo., or Jersey City, N.J.

These are the epicenters of high-frequency trading, a breed of lightning-fast computerized trading that dominates today's stock market, but that critics say carries risks for investors and for the market itself.

Regulators have yet to pinpoint the cause of Wall Street's breathtaking plunge May 6, when the Dow Jones industrial average sank nearly 1,000 points in less than 30 minutes.

High-frequency trading isn't believed to have sparked the sell-off but may have contributed to it.

Also, federal regulators said Monday they are looking at whether big trading firms abandoned the market during that sell-off rather than providing cash support required under law.

Staff of the Securities and Exchange Commission said the possible retreat of big "liquidity providers" during the market plunge is an area of focus in the investigation. Major securities firms are required by law to remain in the market by buying and selling stocks; high-speed electronic trading firms are not.

Some firms that act as liquidity providers stopped doing so during the free fall, the SEC officials found.

Those findings were presented at the first meeting of a special advisory committee to the SEC and Commodity Futures Trading Commission. The panel is examining what happened May 6.

Critics of high-speed trading say it has the potential to destabilize the market at turbulent moments. Given the speed and huge sums involved, one errant trade could wreak havoc, critics say.

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"They're destroying the market from which they're making so much money," said Joe Saluzzi of Themis Trading in Chatham, N.J. "They're like locusts. They come in, swarm the market, squeeze as much as they can, and when they're done they'll just move on to a new market."

The high-speed industry dismisses such criticism. They say they've made trading cheaper and more efficient for all investors, and contend they're being made scapegoats for the perceived transgressions of others on Wall Street.

"Everybody wants to blame high-frequency trading for any sort of malice that's occurring on Wall Street," said Manoj Narang, chief executive of Tradeworx, a Red Bank, N.J., investment firm that does high-frequency trading. "It's a ridiculous blame game."

The rise of high-frequency trading is the culmination of more than three decades of automation on Wall Street, which has seen a host of upstart electronic trading networks chip away steadily at the NYSE. Beginning in the early 1970s with the creation of Nasdaq, an all-electronic marketplace composed of big brokerage firms, these networks were able to execute trades faster and more cheaply than the NYSE.

The Big Board responded by installing its own technology; floor traders were issued handheld devices that replaced the wild gesticulating of earlier generations. It also bought a big electronic competitor.

But ever more sophisticated software, coupled with new government rules to cut investor trading costs and speed up the market, spawned a fresh generation of high-speed traders and new all-electronic stock exchanges catering to them.

Though just a few years old, two new exchanges, Direct Edge in Jersey City and BATS Global Markets in Kansas City, each have seized about 10 percent of U.S. trading volume.

The NYSE's share of trading in its own listed stocks, by comparison, has slumped to 34 percent from 76 percent four years ago, according to Equity Research Desk in Greenwich, Conn.

Firms that engage in high-speed trading, such as Tradebot Systems and Getco, account for an estimated 60 percent to 70 percent of U.S. trading volume, and their market share is on the rise.

Information from The Associated Press is included in this report.

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