The Nerds on Wall Street – Evolution of High-Frequency Trading

Stock market bull, Market trends Project 365 3 Day 164

Stock market bull, Market trends Project 365 3 Day 164—Keith Williamson (Flickr.com)

High frequency trading has been one of the most controversial issues in the stock market lately and has been predicted to be the the entire future of stock market transactions.

High frequency trading firms are using fast data transfer to make quick stock market trade decisions which can be as fast as a fraction of a millisecond. There are so many misconceptions regarding this method and several speculations that this ultra fast system is rigged. Bloomberg’s Inside Look takes us to the evolution of high frequency trading and points out that we should avoid choking out the benefits of HFT:

High frequency trading uses numerous computers capable of handling extreme quantities of data transferred at ultra-high speeds.  It has been estimated that about 70% of all trading are done through high frequency.

A book that talks about this impressive system has also been gaining a lot of attention lately and this is “Nerds on Wall Street”. Author David Leinweber talks about the evolution of high frequency trading and how nerds who develop these systems are now technically taking over stock brokers and traders on Wall Street.

He estimates that all major stock markets will soon be using this automated system. He mentions that there is already evidence that this is happening in Tokyo and pretty soon it will probably completely take over the largest and the most popular stock exchange market, the NYSE. Currently, there are a few people on the NYSE floor, known as floor traders; servers now replace manpower that used to shout out prices. Huge data servers are now the lifeblood of most exchanges as these deliver precious market data as fast as you can imagine.

Leinweber mentions that high frequency trading may come with benefits and may also have a disadvantage over traditional trading. The most impressive feature of this type of trading is flash trading when stocks are bought or sold to a part of an exchange in just a fraction of a millisecond; these may not even be possible using traditional trading methods.

And while flash trading is beneficial to get the best price in the fastest time, it is also a form of front running when an investor decides to purchase huge volumes of stocks from a company as his trader arranges for the transaction. Flash trades are taken as fast as they appear since this is considered the best out of what the exchange could offer before it is disseminated to various markets

Algorithmic trading and flash trading is ideally good for the market since commissions are huge for traders and investors are given the best possible value for their order as well.

Certainly there is so much high frequency trading has to offer and while speculations are growing as to this system’s rise to become the future of most major stock exchanges, there is also a huge possibility that most investors may like the way they have control over market information as they get market data in very fast speeds.

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