RED BANK, N.J. - Above the Restoration Hardware in this Jersey Shore town, not far from the Navesink River, lurks a Wall Street giant.
Here, inside the humdrum offices of a tiny trading firm called Tradeworx, workers in their 20s and 30s in jeans and T-shirts quietly tend high-speed computers that typically buy and sell 80 million shares a day.
But on the afternoon of May 6, as the stock market began to plunge in the "flash crash," someone here walked up to one of those computers and typed the command HF STOP: sell everything, and shutdown.
Across the country, several of Tradeworx's counterparts did the same. In a blink, some of the most powerful players in the stock market today - high-frequency traders - went dark. The result sent chills through the financial world.
After the brief 1,000-point plunge in the stock market that day, the growing role of high-frequency traders in the nation's financial markets is drawing new scrutiny.
Over the last decade, these high-tech operators have become sort of a shadow Wall Street - from New Jersey to Kansas City, from Texas to Chicago. Depending on whose estimates you believe, high-frequency traders account for 40 to 70 percent of all trading on every stock market in the country. Some of the biggest players trade more than a billion shares a day.
These are short-term bets. Very short. The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said.
But some in Washington wonder if ordinary investors will pay a price for this sort of lightning-quick trading. Unlike old-fashioned specialists on the New York Stock Exchange, who are obligated to stay in the market whether it is rising or falling, high-frequency traders can walk away at any time.
While market regulators are still trying to figure out what happened on May 6, the decision of high-frequency traders to withdraw from the marketplace is under examination.
Did their decision create a market vacuum that caused prices to plunge even faster?
"We don't know, but isn't that the point? How are we ever going to find out what's going on with these high-frequency traders?" said Senator Edward E. Kaufman, Democrat of Delaware, who wants the Securities and Exchange Commission to collect more information on high-frequency traders.
"Whenever you have a lot of money, a lot of change, little or no transparency, and therefore, no regulation, you have the potential for a market disaster," Senator Kaufman added. "That's what we have in high-frequency trading."
Some high-frequency traders welcome the closer scrutiny.
David Fuller's view Is high-frequency
trading the financial equivalent of Skynet from the splendid Terminator
films? We can assume that Oliver Stone and other directors are already working
on scripts for their next demonic financial films.
The more I read about high-frequency trading the more concerned I become. I am in awe of the human ingenuity that enabled technology wizards to create these systems but they seem like another "weapon of mass destruction" to me.
If the machines are in charge, then no one is really in charge. If high-frequency trading accounts for 40 to 70 percent of daily volume on US stock exchanges (I have heard estimates of 80 percent) then it is collectively a marauding beast. Even if the inventors of these systems have high ideals, will this also apply to everyone who deploys them? How long will it take before savvy criminals, terrorists or rogue governments tinker with high-frequency trading software to create mayhem?
Providing the markets with additional liquidity is a disingenuous defence for high-frequency trading because that was never the intention. Its inventors want to make money, just like the rest of us. Fair enough but to the extent that markets are a zero sum game, is high-frequency trading predatory? If everyone gave their investment capital to high-frequency trading because they found it superior to human analytical skills, would that not destroy the markets?