Sunday, May 16, 2010

High frequency traders shook markets with penny bets at millisecond speeds

Critics of high-frequency trading say all this talk about narrowing spreads for ordinary investors distracts from a key problem: Split-second trading without human supervision is a recipe for disaster

Exhibit A: the May 6 crash.

SHOOT: Recipe for disaster I think says it all.
clipped from
FILE - In this May 6, 2010 file photo, traders from Barclays Capital work on the floor of the New York Stock Exchange, in New York. Using super-fast computers, high-frequency traders in effect bend down to pick up pennies lying about in the stock market, then do it again, sometimes thousands of times a second. (AP Photo/Henny Ray Abrams, File)

High-frequency trading firms, which number over 100, use computers programmed with complex mathematical formulas to comb markets for securities priced too high or too low because traders haven't had to time to react to the latest data. The computers then buy or sell in a split second, locking in a profit.

But those pennies can add up to a lot of money, enough to draw the attention of Goldman Sachs Group Inc., the giant Chicago hedge fund Citadel Investment and other big financial firms. In recent years they've paid hundreds of millions of dollars for stakes in high-frequency trading companies.

To spot opportunities and act on them before others, HFTs are constantly hunting for faster computers. They also locate themselves close to the big exchanges' data centers. That can cut their trade times by milliseconds.

 blog it

No comments: