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 ?
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.
(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.
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.
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.
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.
there's no barrier to entry," said Cameron Smith, general counsel at Houston-based technology and trading firm Quantlab Financial LLC, which does high-frequency trading.
This frenetic profession has come to be known as high-frequency trading (HFT), and in recent months it has emerged as the hottest ticket on Wall Street.
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.
The experts of the Bank of Russia will continue to study the results and processes through which high-frequency trading affects other market parameters.
Securities and Exchange Commission that two exchanges formerly owned by Direct Edge Holdings (and since acquired by BATS Global Markets, the second-largest financial exchange in the country) have agreed to pay a record-breaking $14 million penalty to settle charges that the exchanges failed to accurately and completely disclose how order types functioned on its exchanges, and for selectively providing such information only to certain high-frequency trading firms.
UK financial regulators have dished out their first ever fine for foul play in high-frequency trading.

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