Explore High Frequency Trading on 60 Minutes

[BenVitale]

I watched on 60 Minutes: How Speed Traders Are Changing Wall Street

It may surprise you to learn that most of the stock trades in the U.S. are no longer being made by human beings, but by robot computers capable of buying and selling thousands of different securities in the time it takes you to blink an eye.

I heard about "high frequency trading" before, but don't know how useful they are, and
what are the risks to the economic system, and to the average investor.

I know a lot of people have suspicions about the people using these 'super-computers'

Are their suspicions warranted?

High frequency trader Manoj Narang says he's helping small investors, not hurting them, because he's always in the market, keeping trading costs down and providing what's called liquidity.

That's what he says ... but is it true?

Watch video: http://www.cbsnews.com/video/watch/?id=6945164n&tag=related;photovideo

http://www.cbsnews.com/stories/2010/10/07/60minutes/main6936075.shtml

 

[CRGreathouse]

Risk to the average investor... not really. Risk to the system? Yes, that's a real risk, IMO.

 

[airborne18]

I agree it is the risk to the system. The real issue has been that they are trading with money they never have, and they are really just creating liquidity simply to create a small bubble and take a quick profit.

It works nice as long as they don't get caught in a trend they have no control over, but when they have losses they have to cover it become mayhem.

 

[BenVitale]

The computer program facilitates a buy or sell order already been determined.
It is cheaper than having someone do it on the phone.

I guess brokers aren't too happy about this!

...
It works nice as long as they don't get caught in a trend they have no control over, but when they have losses they have to cover it become mayhem.

You're referring to "tight coupling" processes ... once it gets going, it cannot be easily stopped.

By one count, there are about 400 of high-frequency trading firms.
About 55% of Nasdaq's volume comes from high-frequency trading firms.

http://www.tradersmagazine.com/news/high-frequency-trading-stocks-volume-104994-1.html

But if a large number of computers doing this, all at the same time, then what?

Couldn't we have a situation a program that would feed back on itself?

 

[airborne18]

The computer program facilitates a buy or sell order already been determined.
It is cheaper than having someone do it on the phone.

I guess brokers aren't too happy about this!



You're referring to "tight coupling" processes ... once it gets going, it cannot be easily stopped.

By one count, there are about 400 of high-frequency trading firms.
About 55% of Nasdaq's volume comes from high-frequency trading firms.

http://www.tradersmagazine.com/news/high-frequency-trading-stocks-volume-104994-1.html

But if a large number of computers doing this, all at the same time, then what?

Couldn't we have a situation a program that would feed back on itself?

I think I misunderstand. Trading and orders is usually a separate business ( and I thought it was mandated that way ). It is one of the things they are trying to totally split from retail brokerages that also trade.

I would think that 400 firms is a low number. Considering all of the funds, brokerages, and investment banks globally.

I remember you could rent out space at a trading company. You just had to put up 100,000 and then you could day trade endlessly.

 

[John Creighto]

Here's another story on high frequency trading:

BATTLE LINES

Whatever the flash crash's ultimate impact, it has the potential to revamp the way tens of trillions of dollars circulate through the world's stock markets. It could also spell significant changes to the business models of banks, brokers, exchanges, funds, and the increasingly dominant proprietary trading firms that all interact daily.

The biggest battles in coming years will likely center on so-called high-frequency trading, or HFT, in which firms use computer codes called algorithms to submit rapid-fire bids and offers, making short-term markets and earning tiny profits on price imbalances.

Having effectively replaced the trading floor specialists of years past -- and often based in offices nowhere near Wall Street or the City of London -- these operations remained quite profitable through the volatile market drop two years ago this month. HFT is now involved in an estimated 60 percent of U.S. stock trading, and 40 percent of that in Europe.

The battle lines are now being drawn.

In a July draft report, British EU lawmaker Kay Swinburne called for a full examination of HFT's costs and benefits, as well as "stress tests" to determine how exchanges would handle a European version of the flash crash. Top European Commission member Michel Barnier went a step further on Tuesday, declaring that HFT needs new governing rules given the inherent risks it poses.
...

http://www.reuters.com/article/idUSTRE69E1Q520101015?pageNumber=2