High Frequency Trading, the Latest Greatest Thing on Wall Street…?
July 24, 2009
Attention to high-frequency trading has been triggered by two events: the first, a case brought against a former Goldman Sachs programmer who allegedly stole secret computer code that could be used to “manipulate the markets in unfair ways”; the second, Goldman Sachs’ impressive returns despite the recent turmoil in the investment banking sector.
High frequency trading occurs when software is used to make millions of millions of trades at a millisecond pace. What is remarkable is how quickly it happens and how quickly strategies can be adapted. Attacks and counter attacks are launched within a second. The trades are so fast that materiality matters. ‘Co-location’, which involves situating the trading room next to the exchange so that the wires and cables running between them are as short as possible, actually confers an advantage to high frequency traders.
The exchanges are in competition to attract high frequency traders and the fees these transactions generate. Abated and encouraged by the exchanges high frequency trading has changed the nature of the markets, putting smaller players like mom and pop day-traders, at a distinct disadvantage. According to a NYTimes report, using the case of Broadcom as an example, “The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.”