High-frequency trading
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High frequency trading encompasses a variety of trading strategies, all of which involve a high velocity of portfolio turnover and the need for extremely fast, high capacity market-data feeds and trade-matching and quoting engines.[1]
High frequency trades are executed on electronic algorithmic trading systems at lightning speed. This type of trading occurs when traders position very fast computers as close as possible to the market's computer servers. The proximity minimizes the time it takes for an order to pass through telecom lines. Traders program those computers to analyze and react to incoming market data in fractions of a second. If the trades are done in large enough volume, they can add up to significant profits.
High-frequency traders make markets in cash equities, exchange-traded funds, options and futures, providing liquidity to markets. However, they have no obligation to support liquidity in difficult market conditions. [2] The super-fast electronic trading systems allow them to arbitrage between minute pricing differences on trading platforms.
Rosenblatt Securities Inc. estimated in Sept. 2009 that high frequency traders account for more than half of the trading volume in the U.S. equity markets, more than 35% of the volume in the U.S. futures markets, and more than 10% of volume in the U.S. equity options markets. [3]
High frequency trading can be used for "flash trading," but the two terms do not mean the same thing.
High frequency trading came under scrutiny in the late summer of 2009 by regulators trying to determine whether they have too much influence over the markets.[4] Some members of Congress asserted that these types of traders were manipulating prices and "front running" customer orders. Others complained that high frequency traders have better access to the markets than traditional investors. [5]
References
- ↑ Justin Schack & Joe Gowronski. "An In-Depth Look at High-Frequency Trading" Rosenblatt Securities, September 30, 2009.
- ↑ Options Industry Leaders Discuss Current Regulatory Issues. Futures Industry Magazine. Retrieved on October 30, 2009.
- ↑ Making Markets: A Conversation With Five High-Frequency Trading Firms. Futures Industry Magazine. Retrieved on February 10, 2010.
- ↑ SIX Swiss eyes high-frequency traders. The Financial Times. Retrieved on September 14, 2009.
- ↑ Making Markets: A Conversation With Five High-Frequency Trading Firms. Futures Industry Magazine. Retrieved on February 10, 2010.
