High
Frequency Trading
When most people think of the stock market, they
picture the fast action on the trading floor with people initiating the
transactions. But for years, there have
been firms trading at warp speed and making billions while being criticized for
troubles in the market. High frequency
traders have been secretive about their operations as their profits grow. But with a growing image problem, they are
stepping out into the light to repair their image with the public and
regulators.
Traders with access to the fastest machines win at
the expense of ordinary investors by seizing on the best deals and beating
ordinary investors to make a profit. Critics say the lightning fast trading
strategies make the financial markets less stable because the speed and volume
of their trades distort prices. The traders claim that they bring greater
competition to the market and make trading fees lower.
These firms now have to defend their practices
that account for 60% of the seven billion daily trades. High frequency trading has been used for a
while by banks and hedge funds but there is a growing number of small firms
utilizing HFT techniques with 10 to 250 people. Most of these new companies
have been founded in the past 10 to 12 years. Many operate using the owner’s
funds.
They operate by purchasing hundreds of thousands
of shares and then selling them in less than a second earning a 10th
of a penny per share. In the past two years, these groups profited 12
billion. Analysis’s believe that these
earnings will taper off with big brokerage firms ramping up their own computer
trading.
These firms use the top of the line computing
power to make their algorithms as efficient as possible. They have to be able to analyze terabytes of
data at a moment’s notice. Even recording the days activities requires the principles
of big data. Although HFT may be taking
advantage of the market, there is not enough evidence at the moment to
criminalize high frequency trading.
I have included a video that investigates the HFT revolution.
You beet me to the post with this, I was actually just looking at this topic. What I find interesting is the fact that these traders have decreased significantly in the last few years. One report that I found shows that income from High Frequency Trading has decreased from 7.9 billion annually to just 1.2 billion annually.
ReplyDeleteThe reason that many believe this is happening is because HFT relies heavily on market volume. A computer can only successfully HFT when a stock is trading hands in great volume or else they can not buy or sale the stock for a profit. And the era of one computer trading another has seemed to stop as HFT managers have seen that this just moves money around without creating any value.
One of the reasons that the volumes have dropped in the markets is because many have lost faith in the previous version of the system. Many have found the idea of day trading and short selling stocks out dated, while others have taken more traditional models that see value in long term positions based dividend reinvestment. Many see this trend as the driving factor behind many companies who traditionally haven't made dividend payments returning to regular dividend payouts to entice buyers. Apple is one example of this.