Wall Street: The Speed Traders 60 Minutes Review

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The stock market has gone from floor traders trading stock by hand to computers trading at lightning fast speeds. Speeds so fast that no human can predict what happens next as stocks are traded in the blink of an eye.

Super computers are now the brains of executing stock market strategies. Super computers are programmed with special mathematical functions by computer programmers to gather data, display and to disseminate data at the fastest rate in history, and they are getting faster.

High Frequency Trading plays an important role in market trading as what we know today and it is also one of the first examples to shed some light on what actually happened in the stock market crash of May 2010.

There are also suspicions by the Securities and Exchange Commission regarding the possible manipulation of stock and the market by super computers; this prompted of course stricter rules high frequency trading firms and fairness of trading systems which are being used as we speak.

The NYSE is one of the most influential stock exchanges in the world. It is where most companies in the world rely on various systems that make or break any company. But now, only about 30% of all the trading is done in the NYSE building in Wall Street; most active trading is done via computer networks and huge servers.

There are currently traditional and electronic trading systems in the US and the electronic systems are owned and operated by high frequency trading companies. These automated systems are so reliable that they can trade over one billion shares a day in ultra fast lighting speeds.

Tradeworxs is one of these high frequency companies who operate on a much lower scale than the big guns. But small as Tradeworxs with a small team of mathematicians and data analysts, it currently trades up to 40 million shares a day. Tradeworxs shows how an automated system would help make on-time decisions faster and more profitable for any buyer.  It is now possible to predict future market prices based on computer technology that gives on-time data. With these systems used at stock markets it is now possible to analyze stocks past performance, present behavior and predict future movements. However, take note that systems make predictions which has nothing to do with what the companies do or any background of what the company does. They simply make decisions based upon supply and demand.

With the use of algorithms (mathematical formulas that give rules to the computers to follow) HFTs help predict and adapt to both market conditions and the buy and sell demands on individual stocks, essentially allowing high frequency trading companies to determine the intent of other investors.

The rise of high frequency traders has gone from just 30% of trading to now 70% of all actual trading activities in the stock market. But some traders who have trusted the traditional strategy in making money through stocks are certain that trading using high frequency may be rigged. But with this possibility, traditional traders also agree that super computers certainly make trading faster and more efficient.

With the proximity of super computers and servers to exchanges, data is transferred at almost the speed of of thought. Just like the huge data center for the NYSE located in New Jersey; it is the “nerve center” of all information and data that is collected and captured from the exchange.

Expert traders also agree that the efficiency of HFT super computers to deliver market data in ultra fast speeds also gives high frequency traders an edge over others. Even a fraction of a millisecond makes a difference when it comes to dealing with stocks; it is also possible that with such fast speeds that there are orders that are not seen. These fast orders are only captured by efficient and very fast computer systems.

The possibility of a rigged system, which is basically programming the system to recognize only the bids of huge players are also questionable. However, there is actually no evidence that a rigged system is in fact happening. Proponents of high frequency trading agree that even with all the features of various programs and software, it still all boils down to liquidity. Liquidity is getting a fair price when anyone wants to buy stocks.  The counter argument is that HFTs create an inflated market where no one can get a fair price for anything without over paying, and that when  a fair market returns, the hfts turn off and the market crashes.

The profitability of using high frequency market making algorithms is also attracting law makers attention. S senator from Delaware agrees that it is very difficult to determine exactly what traders are telling their computers to do. Transparency is needed to ensure that high frequency companies are doing legit activities that can surely affect market trading anywhere.  On the flip side, HFT algos only work when kept completely confidential, so both sides have a point.

Going back to the crash of May 6, 2010, high frequency traders played a huge role in the cause and in formulating strategies to make the market safer and more stable. SEC officials on the other hand are looking for ways to create a system that can regulate and tag high frequency traders once and for all. Regulation will hopefully make systems fool proof and secure even when a single algorithm is entered as a mistake.

The concern now is to be able to return the investors and the public’s interest and trust in the stock market system. The impact of the flash crash on May 6 has made investors think twice in dealing with stocks which could ultimately lead to the demise of the system unless something is done.

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