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-speed trading is looked down upon globally, so much so that Craig Hodges, co-portfolio manager of the Hodges Funds, said in a CNBC interview, "Basically, I have more respect for a guy that takes a gun and robs a store.
M2 EQUITYBITES-March 24, 2017-Quantlab Acquires High-Speed Trading Business of Tea Technologies
Some commercial businesses have sought tough rules on automated trading because of concerns that some high-speed trading algorithms from competing firms can get ahead of their placed orders and force them to pay inflated prices
For example, Spread Networks, a high-speed trading firm, paid $300 million to build cables from New York to Chicago so that they could trade on the Chicago exchange using New York information microseconds before the market learned the information.
At the same time, however, such a fee "would rein in the kind of computerized high-speed trading that skims value from regular investors while adding no value to the economy.
Blaming high-speed trading technology for informational inequities is like blaming the train for a derailment caused by a stalled vehicle on the rail.
Schneiderman alleged that Barclays "lied to brokers through private and public assurances by Barclays that investors in its pool were continually shielded from high-speed trading when, to the contrary, the bank actively sought to attract such traders.
The bank is alleged to have promised clients that it would protect them from aggressive high-speed trading firms in so-called 'dark pools', while taking steps that were beneficial to the companies.
Her comments came two weeks after she outlined the SEC's plan to strengthen the equity market structure and make it more transparent, as well as addressing issues related to high-speed trading, such as more oversight.
economic news, Securities and Exchange (SEC) Commission Chair Mary Jo White announced for the first time that the organization would establish stricter rules for high-speed trading and dark pools.
It's possible that by the time regulators catch up with the stock market distortions caused by high-speed trading, the problem will already have been corrected.
Washington: Regulators have sharpened scrutiny of high-speed trading in the wake of criticism that architects of the cutting-edge practice have rigged the market against ordinary investors.