high-frequency trading

Buying and selling large quantities of stocks in split seconds, and making pennies or fractions of a penny per share. High-frequency trading (HFT) is performed entirely by computer algorithms that look for and take advantage of small price discrepancies of the same stock on different exchanges. HFT computers are constantly bidding and offering 100-share lots of thousands of different stocks to determine moment-to-moment prices. In addition, traders can spoof the market by placing large sell orders, cancel them milliseconds later and immediately buy the stocks at a lower price, which they caused by injecting negativity into the market.

High-frequency traders compete with other high-frequency traders all day long. In order to profit, the buys and sells must be executed immediately, and the shorter transmission pathways between orders and executions make the difference. To speed up the process, high-speed traders locate their computers within the same datacenter as the stock exchange computers or as close by as possible. In the most extreme example, to shave off nanoseconds, a fiber optic line was laid in the straightest line possible between Chicago and New Jersey (between the Chicago futures exchange and the New York stock exchanges).

Extremely Controversial
Proponents claim high-frequency trading is simply an advanced form of algorithmic trading like all the other widely used financial formulas. High-frequency traders also claim their systems make a more uniform market and have a stabilizing effect.

Opponents claim HFT is downright deceitful, making money by executing software that makes profits on 99% of its trades. They claim traders make billions per year without contributing any value to society. In the Flash Crash of May 6, 2010, the Dow swung 1,000 points within minutes. Regulators reported that high-frequency trading exacerbated market volatility after the sale of unusually large futures contracts. Had the event occurred at a different time of day, the effects might have gone global. Opponents believe that this form of trading will wreak even greater havoc on the market in the future. See high-frequency crypto trading.

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References in periodicals archive

The Speed Traders Workshop 2012 Shanghai will reveal how high-frequency trading players are succeeding in the global markets and driving the development of algorithmic trading at breakneck speeds from the U.S.

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(7) The risks of many technologically advanced trading tools, including high-frequency trading, as of the beginning of 2010 had yet to be realized while others such as "flash orders" garnered proposed SEC regulation.

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The report examines the facts about high-frequency trading (HFT) in foreign exchange (FX), including its definition, effect on other market participants, behaviour in normal and stressed times, and key differences compared with HFT in equities.

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The consultation document on MiFID II that the European Commission (EC) released in December 2010 suggested several measures to deal with the perceived threat to market stability posed by greater levels of high-frequency trading, including an obligation for HFT firms to provide liquidity in times of market stress; a requirement for all HFT firms above a minimum size to be registered; an obligation to inform authorities of algorithms used with detail on how they function; and the introduction of either proportional limits on order cancels or minimum 'resting times' that orders would have to spend on order books.

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Coinbase is shuttering its Chicago office and laying off roughly 30 engineers as it scales back plans to develop a "matching engine" product aimed at high-frequency trading, Forbes' Jeff John Roberts reports, citing a company statement.

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