Earlier this week I went into discussing how high frequency trading was yielding certain investors billions of dollars in profits. What I didn’t include in that article though was the basis for understanding high frequency trading, what it is exactly, how it works, etc. Today’s tech ticker though has a phenomenal stock education video explaining just that.
High Frequency Trading Education
From today’s Tech Ticker here are three great points to break down the main facts and help clear up any confusion regarding high frequency trading:
- It’s a good thing: High-frequency trading provides liquidity and helps ensure the “certainty of orders,” Sussman says, by giving investors rapid response to their buys and sells. In this regard, computer-driven high-frequency trading makes for more efficient markets vs. the old days, when human “specialists” could sit on a order for seconds or even minutes before executing.
- It’s huge: TABB estimates high-frequency traders are involved in 73% of all U.S. equity volume today, up from 35% in 2006. The research firm estimates high-frequency traders have generated $21 billion in annual revenue over the past 12 months. (Notably, high-frequency trading isn’t new it’s just getting more popular as the cost of computing has come down and barriers to entry fall.)
- There’s a difference between high-frequency trading and “flash orders”: This is key because many recent reports have wrongly conflated the two. “Flash orders” – provided by electronic exchanges such as BATS and Nasdaq OMX – give the recipients an advantage by providing them a look a buy and sell orders a fraction of a second before they are made available to everyone. Flash orders slow down execution and increase uncertainty, Sussman says. “The problem with flash orders is it introduces the same level of uncertainty as sending orders to a human being,” he says. “It’s an intentional slowing of your order” — even if just by milliseconds.
Understanding High Frequency Trading
And with that said to fully understand the ability to take advantage of milliseconds of time to make profitable trades via super computer here is the education video on high frequency trading (RSS and Email Readers click to view this article on STTG to watch the video).
The real problem is not so much the high frequency trades but the flash orders. Explained in the video these order types are designed to exploit flaws that more or less screw over the average retail investor.
UPDATE: NASDAQ, BATS to stop offering flash trading. SEC Moving towards banning the practice all together.
High-Frequency Trading 101: The Good, the Bad and the Truth
Yahoo Tech Ticker, Jul 30, 2009 10:46am EDT