When you think of the stock market you may think of the line of numbers at the bottom of the TV screen, the traders on the floor of the NY stock exchange, or of Wall Street itself. What you probably do not think of is large computers and servers. However, recently that is what the stock market is looking more and more like. Since the advent of computers traders have used the speed and logical calculation of computers to do more and more trading. Many outfits now exclusively use computers and algorithms, or computer code, to make trades. They also make a lot more trades per day thanks to the efficiency of computers. Although high frequency trading (HFT) makes the market quicker and some argue more logical, many believe it is adding undue influence and volatility into the market place.
The Rise of HFT
Michael Lewis wrote a book on the subject called Flash Boys. In it, he highlights the rise of HFT and what his view of the practice is. By flooding the market and not holding a position within the market but merely trying to invest, HFTers are far more of a risk than a benefit. High frequency trading works by firms sending a high volume of orders to buy or sell a stock then turning around and selling or buying at a meager profit quickly, often beating other investors who are not as quick. This process only nets cents or fraction of cents per trade, but due to the high volume and speed with which these traders trade, the profits they gain can be astronomical.
HFTers thrive off speed. In fact, milliseconds can make the difference between success and failure in how they do business. Many would even pay a premium price to be located closer to the servers of various stock exchanges or alternative trading pools because if their cord connecting them to the server was inches shorter it would give them a distinct advantage over their competitors. This influx of traders trading large amounts of stock per millisecond has been blamed for several recent stock market maladies over the past few years. One of these is the Flash Crash. The problem, say many critics, is that the computer algorithms are so aggressive that they do not always act reasonably when stocks begin to go down, rather they attempt to unload everything they can in order to salvage their losses. Many see this as too predatory.
While many have critiqued HFTers, their impact is undeniable. Modern technology will continue to have an impact on our world economy and we must continue to learn the pros and the cons of new technology. This is not the first time the stock market has undergone a dramatic change – the use of telephones to make orders was once considered a drastic change, as well. You can be assured that Cambridge Realty Capital will always stay ahead of the curve on the variety of technological advances made in the investment world.
