A Closer Look at High Frequency Trading

Stock market bull, Charging Bull

Stock market bull, Charging Bull—prayitno (Flickr.com)

High frequency trading strategies have been making impressive gains through up to date market information, automated trading and supplying needed algorithm information the predicts future market trends. But are all these things changing the way stocks are traded forever? 

Before HFTs, stocks were traded in an open outcry system. But today interconnected and efficient computer systems used for trading have replaced noisy floor traders with the quite hum of computer processors.

One of the heads of a famous equity trading in New Jersey is Joe Saluzzi. He mentions that truly the equity market has changed and it is already a far cry of what we used to see on television. It is no longer about men wearing colored jackets moving around the floor; all of these have been replaced by computers that are interconnected to form a fast and efficient system.

Computers used in trading stocks can perform programs as fast as it can and even in the thousandths of a second. Every second counts in high frequency trading since every minute there is always something happening all around the world.  Andrew Haines of Gain Capital is a broker who works online. He explains that a millisecond can mean millions of dollars to any business or company. Countless business strategies and transactions may be done with millions of dollars.

Having even the tiniest advantage like a one millisecond advantage over other traders and investors could mean that you have traded at the most preferred price. Haines also explained that about 70% of all stocks that are traded in a day are all made by high frequency traders. Stocks are traded in a fraction of a second when you use this treading style however, the use of high frequency trading as been blamed for huge moves in stock prices anywhere.

The Securities and Exchange Commission has ordered important steps to prevent “flash crashes” that are comparable to the market crash of May 2010. Experts call these preventive measures circuit-breakers, these protect the market when a stock has moved by a large amount in a short period of time, like the circuit breaker triggered by Groupon. When these circumstances happen, a halt in the system is done which does not affect trading at all.

Saluzzi further explains that one of the main problems with using a high speed market is an unbalanced market. The stock market which was once regarded as a predictor of the economy is now a “backwards predictor”. The moves are foretasted in the next microsecond or the next six months; this is because people who run high frequency trading do not even care about the next six months; so how do you know that prices are being set correctly?

However, there are also circumstances that high frequency trading may also act as market makers which is passively waiting for possible sellers and buyers that need to trade. This is certainly makes the market stronger and certainly helps investors get the best value of their trade.

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