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 ?
supra note 8, at 315 (identifying the various strategies used in high-frequency trading that will be marked for investigation and regulation under the new Dodd-Frank Act).
High-frequency trading platforms essentially make profits by extracting a tiny fraction of every transaction, but generating volumes of trades at speeds never imagined a decade ago.
It's this software coupled with our high-frequency trading expertise that allows us to profit in volatile markets.
That doesn't seem to touch high-frequency trading at all, as shares were not even changing hands yet.
Perez, High-Frequency Trading has been referred to as the natural progression of technology applied to the investing and trading worlds.
Celoxica's futures Container provides a fully optimized, ultra-low latency market data and trade execution platform, offering the complete suite of application solutions essential to executing high-frequency trading strategies for futures on a single server.
The Speed Traders Workshop 2012 Beijing 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.
and European trading firms increasingly look to migrate their high-frequency trading strategies to the Asian markets.
Bodek, former head of Trading Machines LLC (following stints with Goldman Sachs, UBS and others), has blown the whistle on deceptive practices by certain high-frequency trading firms and financial exchanges catering to them.
A star-trader with the Royal Bank of Canada, Katsuyama, having been posted to Wall Street in New York, discovered that high-frequency trading could and did give traders an edge, and Katsuyama realised that this was, essentially, unfair to investors.
The class action alleges that the securities exchanges together with the brokerage firms and the high-frequency trading firms resorted to inappropriate methods while carrying out business transactions.
A long-term investor is invested before and after any high-frequency trading.

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