High-Frequency trading is often considered as an unethical practice in US and UK as it may lead to risk-free trades before the rest of the market has the time to react. Here are some interesting facts and information about this modern way of trading.
What is High-Frequency Trading All About
High-frequency trading is based on state-of-the-art computer technology and internet connections which allow opening and closing trading positions in milliseconds, that’s why we are referring to the millisecond markets.
Mr Schneiderman Concerns
New York's attorney general, Mr Schneiderman has recently raised concerns that corporations mastering high-frequency trading can benefit from the special conditions provided by stock markets today. These conditions include key market data such as volume, pricing, and order confirmation.
Furthermore, Mr. Schneiderman said "If a firm can detect a large order from an institutional investor - like a pension fund - it can instantaneously position itself on the other side of the trade, driving up the prices artificially,"
Automated Computerized Trading may add Systemic Risk to the Global Financial System
According to BBC, there are several cased when computerized trading led to enormous losses. Here are two similar events according to BBC:
■ In 2012, a New Jersey-based trading firm, Knight Capital, lost close to $440m after a computer glitch caused the firm to execute 150 mistaken orders to the New York Stock Exchange.
■ In May 2010, computerized trading was blamed for the "flash crash" which briefly sent US markets down 5% before the error was discovered.
In a few minutes, the New York Stock Exchange plunged, and then just as suddenly recovered again. Share prices in some firms, such as the consultancy Accenture, plummeted to a fraction above zero, while Apple soared to $100,000. For months afterward, nobody could explain what had gone wrong.
FCA UK and the US Financial Regulator have fined a high-frequency trader and his firm more than $3m
The FCA UK fined Michael Coscia and his firm Panther Energy $0.9 million while the US regulators fined him $2.1 million.
- Between 6 September 2011 and 18 October 2011, US-based Mr. Coscia used algorithmic programs that he developed to create false orders for oil and gas on trading exchanges in the US and UK.
- He made about $1.4m during the period using a computer program that placed and quickly canceled trades to manipulate the price of commodities, an illegal process known as "layering" and "spoofing".
Scalping Markets -Closer servers, straighter cables
There are many financial firms that can make profits by scraping the markets. Scalping a tiny profit margin on an unthinkably huge volume of rapid-fire buying and selling.
Different algo traders use very different strategies. But they all share the need to identify trading opportunities - fleeting discrepancies between the available market price and where the computer deems the price ought to be - and then react to them faster than anyone else.
The Race to Zero
It is called the "race to zero". And it has led to the investment of billions of dollars in faster, smarter computers, and the fastest possible connections.
|
Route Technology |
Year of Completion |
Time for a complete Roundtrip (million seconds) |
|---|---|---|
|
Original fibre optic cable |
The 1980s |
14.5 |
|
Spread Networks fibre optic cable |
2010 |
13.1 |
|
McKay Brothers microwave beams |
2012 |
9.0 |
|
Tradeworx microwave beams |
2012 |
8.5 |
Source: Wired Magazine
At stock exchanges across the planet, traders pay hefty fees to "co-locate" their servers directly next to the exchanges and hundreds of millions have been spent on building straighter cables.
■ This Post was based on articles and information published in BBC UK