High Frequency Trading: Wall Street’s Doomsday Machine?

High Frequency Trading: Wall Street’s Doomsday Machine?

Another week, another Wall Street scandal, and another opportunity for pundits to bemoan the incompetence and venality of America’s financial professionals. Last Wednesday’s near collapse of Knight Capital Partners – in which a bug in one of its high-frequency trading algorithms caused the firm too loose $440 million – has raised concerns about high frequency trading and what the practice means for the safety and trustworthiness of our financial markets. But what is high-frequency trading, and is it really all that dangerous?

High frequency trading is a catch-all term that describes the practice of firms using high-powered computers to execute trades at very fast speeds – sometimes thousands or millions of trades per second. These systems have developed over the past ten years, and began to really dominate Wall Street over the last five. For example, a high-frequency trader might try to take advantage of miniscule differences in prices between securities offered on different exchanges: ABC stock could be offered for one price in New York and for a slightly higher price in London. With a high-powered computer and an “algorithm,” a trader could buy the cheap stock and sell the expensive one almost simultaneously, making an almost risk-free profit for himself.

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This entry was posted in Articles, Dark Pools, Events, Finance, High Frequency Trading, Wall Street and tagged , , , , , , , . Bookmark the permalink.

One Response to High Frequency Trading: Wall Street’s Doomsday Machine?

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