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11 Appalachian J.L. 209 (2011-2012)
The Rise of High Frequency Trading: The Role Algorithms, and the Lack of Regulations, Play in Today's Stock Market

handle is hein.journals/appalwj11 and id is 225 raw text is: THE RISE OF HIGH FREQUENCY TRADING: THE ROLE ALGORITHMS, AND THE LACK OF REGULATIONS, PLAY IN TODAY'S STOCK MARKET Nathan D. Brownt I. INTRODUCTION In today's world, most aspects of society operate electronically. From the invention of the desktop computer to the launch of the iPad into mainstream America, the digital age has encompassed most aspects of our lives. This transformation has not eluded Wall Street or the large institu- tional investor. As much as 70% of the daily trading volume on the New York Stock Exchange (NYSE) is now computer generated.' As part of a high frequency trading (HFT) strategy, computer generated algorithms dominate daily trading volumes.2 Algorithmic trading uses computer pro- grams to enter trading orders with the computer algorithm deciding aspects of the order, such as the timing, price, and quantity of the order, or in many cases, initiating the order without human intervention.' Algorithmic and HFT are similar forms of computerized trading. However, they differ in that algorithmic trading may have longer holding periods; whereas, HFT firms may hold their position for a very short hori- zon and try to close the trading day in a neutral position.' Therefore, HFT must be a type of algorithmic trading, but algorithmic trading need not be HFT.' Algorithmic trading codes are so valuable that a high-level trader risked his job at Goldman Sachs in order to procure the proprietary code it used to initiate their computer based trades.' Many of these algorithmic trades occur in what are labeled dark pools. The name may sound elu- sive because it is. Dark pools are aptly named because trades are concealed from the public, and the trades in the dark pools are used to muddy the t J.D. Candidate, Appalachian School of Law, May 2013; B.S. Accounting, University of Pikeville; M.B.A. University of Charleston. 1. John Stokes, Computer-Trading Worries Grow as NYSE Builds New Datacenter, http:// arstechnica. com/tech-policy/news/2009/08/nyse-builds-computer-trading-mothership- worries-abound.ars (accessed Sept. 2009). 2. HFT Review, High Frequency Trading & Algorithmic Trading, http://www.hftreview. com/pg/blog/mike/read/5307/high-frequency-trading-algorithmic-trading/ (accessed Feb. 15, 2010). 3. See Automated Trader, Algorithmic Trading - what is it?, http://www.automated trader.net/Algorithmic Trading.xhtm (accessed Oct. 17, 2011). 4. Jonathan A. Brogaard, High Frequency Trading and Volatility 1 (U. ofWash. Foster Sch. of Bus., Working Paper July 16, 2010) (available at http://ssm.com/abstract=1641387). 5. Id. 6. United States v. Aleynikov, 737 F. Supp. 2d 173, 174 (S.D.N.Y. 2010). 209

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