Monday, 18 October 2010

High-frequency trading

The last couple of year computerised stock market trading, so called high-frequency trading. This refers to computer programs acting on the stock market based on defined parameters and searching for pricing discrepancies between market places. These programs are designed to help investors, in this case exclusively large scale investors, to act on small changes or differences in stock prices. This trading is extremely short term, oand volumes are often large. The extreme short time frames of the trades have made internet connections very important, in this case it is a matter of milliseconds or even smaller fraction of a second. It has come to the point where companies running such computers are trying to run them as physically close as possible to the stock exchange to decrease transfer times by minimising the distance that the signal need to travel.

It has been estimated that these kind of trading makes up 2/3 of all trading in the USA. Thus it is increasing the volumes of the stock market, which is often seen as a good thing, especially for smaller traders. However, it also brings negative effects, for example when these machines act on signals they tend to increase the volatility, meaning they increase both ups and downs. If a stock falls enough to trigger a sell signal for the computer program large volumes will be sold and thus increasing the fall, and the other way around.

High-frequency trading is being discussd by policy makers and sort of regulation in the not too distant future would not be unexpected.

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