Is this the wave of future trading? I hope not but I can see your point......
Muzikman
High-Frequency traders are making billions outrunning, outsmarting ordinary investors
Jul 25, 2009 04:30 AM
Toronto Star
CHARLES DUHIGG
The New York Times
It's the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors' orders and even, critics say, subtly manipulate share prices.
It is called high-frequency trading – and it is suddenly one of the most talked-about and mysterious forces in the markets.
Powerful computers, some housed right next to the machines that drive markets such as the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else's expense.
These systems are so fast they can outsmart or outrun other investors, humans and computers alike. After growing in the shadows for years, they are generating lots of talk.
Nearly everyone on Wall Street is wondering how hedge funds and large banks such as Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.
When a former Goldman Sachs programmer was accused this month of stealing secret computer codes – software that a federal prosecutor said could "manipulate markets in unfair ways" – it added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.
Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.
"This is where all the money is getting made," said William Donaldson, former chairman and chief executive of the New York Stock Exchange and now an adviser to a big hedge fund. "If an individual investor doesn't have the means to keep up, they're at a huge disadvantage."
For most of Wall Street's history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces such as the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.
But as new marketplaces have emerged, PCs have been unable to compete with Wall Street's computers. Powerful algorithms execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before most investors can blink, changing orders and strategies in milliseconds.
High-frequency traders often confound other investors by issuing, then canceling orders almost simultaneously. Market rule loopholes give high-speed investors an early glance at how others are trading. Their computers essentially bully slower investors into giving up profits, then vanish from view.
The rise of high-frequency trading helps explain why activity on North American stock exchanges has exploded. Average daily volume has soared by 164 per cent since 2005, according to data from NYSE. Precise figures are elusive, but stock exchanges say a handful of high-frequency traders now account for more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, finally handing spoils to lightning-fast computers.
It was July 15, and Intel, the computer chip giant, had reported robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom's price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.
The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds – 0.03 seconds – in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.
In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.
Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors' upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.
The result is that slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as high-frequency traders.
Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates.
Technology is changing the rules
Jul 25, 2009 04:30 AM Toronto Star/ Reuters
High-frequency electronic traders and alternative trading systems are changing the rules for Canada's staid markets and encroaching on a near-monopoly long held by the Toronto Stock Exchange.
"There's no doubt it (high-frequency trading) is the hottest topic right now in Canada," said Joe Gawronski, president and chief operating officer at agency broker Rosenblatt Securities.
In the United States, high-frequency traders account for an estimated two-thirds of stock trading volume, Gawronski said.
In Canada, that figure is closer to 15 per cent, but he forecasts a 25 per cent share by the year's end.
Familiar high-frequency names include Getco, a privately held electronic trading firm, as well as the Citadel hedge fund.
The high-frequency trend raises the potential for market share losses by the TSX.
Canadian alternative venues include Alpha Trading Systems, owned in part by the dealer arms of Canada's big banks; Pure Trading, operated by CNSX Markets Inc.; and Chi-X Canada, owned by Nomura Holdings Inc.'s Instinet.
"You'll see people start embracing these alternative marketplaces in Canada," said Martin Piszel, head of alternative execution services at CIBC World Markets. "I think it's early days."
A spokesperson for the Ontario Securities Commission said that the agency is "monitoring this issue."
Reuters News Agency, Toronto Star
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