commentary on Politics and a little bit of everything else

HFT…….High Frequency Traders in the Stock Market……..

The drop in the market a little more than a week ago has flushed out a new fact…..

A large amount of trading these days are done by a new phenomenon…

High Frequency Traders (HFT)….

Unlike the traditional trading system that involves people watching an issue then picking up their phone to call a broker…whio will then buy that issue…

This occurring in minutes or up to an half an hour….

HFT trading is done solely by computers in nano seconds…..That’s thosand of a second!

The computers are set to find the movement of an issue…and move in a and out of the issue en.mass during the lag between when the market knows it’s moving and it actually moves…

That time frame could be minutes, hours…..or seconds!….

Because of the speed of these transactions…..

There is no way for humans to oversee them in real time…

The only way to do so would be to set protocols in the computer’s software…..

Which isn’t being done right now….

The stuff is real complicated…..

But the technical crash that happened a little more than a week ago shows what can happen when computers get in a loop …….

Technology always needs humans to oversee it….

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.

The opportunities seem hardly worth noting. They’re not just fleeting, but small, often a penny or less.

But those pennies can add up to a lot of money, enough to draw the attention of Goldman SachsGroup 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.

The money has stoked what was already fierce competition among the firms for a leg up.

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.

One way these traders make money is by exploiting the fact that stock indexes sometimes don’t immediately reflect falling or rising prices of their component stocks, said Manoj Narang, chief executive at Tradeworx of Red Bank, N.J. If Microsoft shares rise 5 percent but an index fund that includes it such as the SPDR S&P 500 lags by a fraction of second to adjust, his computers will automatically buy shares of SPDR S&P 500 at the lower price and then sell them again when they are fully valued.

Or 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.

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.”

So is that good or bad for the market?

If you listen to HFTs, all their fast trading benefits big and small investors alike. More trading means more bids and asks for shares, and that cuts the time needed to find someone willing to buy what you’re selling or vice versa. Costs also fall. With more bids and asks, the difference between the price you seek and the price offered (what traders call the ”spread”) will likely narrow. You get to keep more of your money.

High-frequency traders see themselves as part of a long tradition of using technology to shake up Wall Street…..



May 16, 2010 - Posted by | Blogs, Breaking News, Computers, Counterpoints, Media, PoliticalDog Calls, The Economy, Updates | , ,


  1. […] This post was mentioned on Twitter by James Finley. James Finley said: HFT…….High Frequency Traders in the Stock Market……..: http://wp.me/pAL4p-2Ss […]

    Pingback by Tweets that mention HFT…….High Frequency Traders in the Stock Market…….. « PoliticalDog101.com -- Topsy.com | May 16, 2010 | Reply

  2. Oh man.. The Sci-Fi stuff is coming true. Humans make machines too smart and complicated to understand – and things get out of control.
    Hope there’s no nuke-buttons connected to those things..

    Comment by talkandpolitics | May 16, 2010 | Reply

  3. It is a bit scary….

    This whole thing operates in hundreds and thousands of A second!

    Comment by jamesb101 | May 16, 2010 | Reply

  4. well the USA should have never such meanies to the Native Americans and Chinese

    Comment by Timothy Leal | May 16, 2010 | Reply

  5. What????

    Comment by jamesb101 | May 16, 2010 | Reply

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