high-frequency trading


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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 are competing 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, a fiber optic line was laid from New Jersey to Chicago in the straightest line possible in order to shave nanoseconds from the travel time. The futures exchange is in Chicago, and New York-based stock exchanges have their datacenters in New Jersey.

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, turning money making into software that executes 99% of its trades with a profit. They claim high-frequency traders make billions per year without contributing any value to anyone but themselves. In the Flash Crash of May 6, 2010, when 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 the day, the effects might have reached around the world. As a result, opponents assert that high-frequency trading could turn the market into greater bouts of chaos in the future.
References in periodicals archive ?
High-frequency trading has recently seen its moment in the spotlight, especially following the release of Michael Lewis's book "Flash Boys" detailing the practice.
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Despite an earlier concept release in January 2010 on high-tech market tools, the SEC is now required by the Dodd-Frank Act to conduct research and propose legislation on high-frequency trading regulation.
A panel on high-frequency trading in London on 24 February 2011 confirmed the relative
TXC, established in April 2009, offers solutions including infrastructure, software, start-up services and provision of capital to the high-frequency trading communities in the US and Europe.
Components of high-frequency trading and nature of the markets
Since then, technology has accelerated, with high-frequency trading platforms ramping up the speed to milliseconds and more recently to microseconds.
Many investors fear that high-frequency trading may fall prey to bad habits.
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These investors want access to low-latency algorithmic and high-frequency trading strategies across multiple asset classes.
The proposals follow FINRA's meeting today, where much of the agenda focused on high-frequency trading and equity-market transparency.

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