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High-Frequency Trading
Updated: Oct. 10, 2011
Computerized trading of stocks first became a significant part of the Wall Street scene in the 1980s, when it was blamed for exacerbating the market plunges in October 1987. Since then, the computers involved have grown vastly more powerful and the algorithms that guide their trading vastly more sophisticated.
For years, high-frequency trading firms have operated in the shadows, often far from Wall Street, trading stocks at warp speed and reaping billions while criticism rose that they were damaging markets and hurting ordinary investors. Now they are stepping into the light to buff their image with regulators, the public and other investors.
After quietly growing to account for about 60 percent of the seven billion shares that change hands daily on United States stock markets, the firms are trying to stave off the regulators who are proposing to curb their activities. To make their case, the firms have formed their first industry trade group, hired former Securities and Exchange Commission staff members and spent nearly $2 million in the last few years on Washington lobbying and contributions to lawmakers. Some even want to be called “automated trading professionals” rather than high-frequency traders.
High-frequency techniques are used by Wall Street banks and hedge funds, but it is new independent firms that account for the bulk of this new kind of activity. Most of them were founded in the last 10 to 12 years. Many are still relatively small, employing a dozen to a hundred people, though some have as many as 250.
Trading mostly with their owners’ money, they scoop up hundreds or thousands of shares in one transaction, only to offload them less than a second later before buying more. They can move millions of shares around in minutes, earning a tenth of a penny off each share.
As a group, they earned $12.9 billion in profit in 2009 and 2010, according to the Tabb Group, a specialist on the markets.
The S.E.C. started to think these firms needed tighter controls in early 2009 when analysts for the first time began to point to the sector’s billions in profit, and critics wondered whether their technological firepower gave them an unfair advantage.
The scrutiny intensified after the May 6, 2010, flash crash, one of the most abrupt market moves in recent history, when stocks plunged some 700 points in minutes before recovering.
Regulators did not blame high-frequency traders for causing the sell-off. But some firms may have exacerbated the decline by switching off their machines and withdrawing from the market. As the number of buyers dropped drastically, so too did the stock prices.
By late 2011 regulators in the United States and overseas were cracking down on computerized high-speed trading, worried that as it spreads around the globe it is making market swings worse.
