The Casino Called Wall Street
May 15, 2010 3:11 PM Subscribe
Maybe Microsoft is trading in London at a penny less than it's trading at the same moment in New York. A high-frequency trader will buy shares in London and wait for them to rise. Since the discrepancy lasts a mere fraction of a second, speed is key. [Tradework CEO] M. Narang boasts it takes only 15 millionth of a second for his computers to place a buy or sell order after detecting an opportunity. Or, as he puts it, "If you try to pick up the penny, we'll probably beat you to it."
posted by HP LaserJet P10006 (62 comments total)
15 users marked this as a favorite
While the exact cause
of the stock market's recent "flash crash" remains uncertain
, the event has renewed concern about the incredible growth of high frequency trading (HFT) in the market.
To put HFT in the broader context of how the complexity and speed of the market has changed, consider the recent remarks of SEC chairman Mary Schapiro (from the "remains uncertain" link above; all of her comments are well worth reading BTW):
Although developments in the markets and in technology may help speed access to market data, they also greatly complicate our efforts to analyze the complex web of trading arrangements and market dynamics that have developed since 1987. For example, the key day in the 1987 Market Break Study involved a trading session processing a little over 600 million shares in NYSE stocks. Last Thursday, the markets processed 10.3 billion shares in NYSE stocks alone. In addition, the interconnections among markets and among equity securities and derivatives have grown immensely more complex over the past few years. Orders in one stock directed to one market can now ricochet to other markets and trigger algorithmic executions in other stocks and derivatives in milliseconds. By contrast, in 1987, investigations could focus their attention on discrete transactions largely effected on only one or two markets.
There's also the question about whether or not HFT increases the possibility for fraud
. As one commenter on a HuffPo thread
notes (how accurately, I cannot say):
certain stock exchanges, such as Direct Edge, will--for a fee--send a 'flash' of a upcoming trade to the firms that engage in high frequency trading. For instance, if a mutual fund is going to buy 1 million shares of IBM, Goldman Sachs or other companies with HFT operations will get a notice from Direct Edge that this is about to happen. Within milliseconds, the HFTs put in buy orders for IBM, then let the mutual fund buy their 1 million shares, which pushes the stock price up, and then the HFTs sell at a couple of pennies higher. As it stands right now, this is LEGAL. The SEC is looking into blocking the practice, which they should, because it's simply a high-tech version of insider trading.
Whatever the case about HFT and the role it plays in market volatility and/or manipulation, one thing is certain: some investors are preparing themselves for any future "flash crash,"
and no doubt hoping to exploit it.