One of the most controversial lately in American financial markets phenomena has been the emergence of high frequency trading ( High Frequency Trading – HFT), made by super-computers serving large institutional investors.
An interesting report recently issued by the American television network CBS, we have some details of this opaque world; its participants, the peculiar way to make money in financial markets and fears aroused by this practice.
Currently it is estimated that 70% of trading that takes place in USA is the work of HFT machines, used by investment banks such as Goldman Sachs, Barclays, Credit Suisse-Morgan Stanley and hedge funds .
The operation of these systems is based on super-computers connected to high – speed electronic trading platforms , running complex algorithms based on current market conditions, statistical analysis and past performance, trying to anticipate the movement of shares in the next split second.
Is not only important processing speed and accuracy of calculation programs, but also the speed with receiving information.The super-computers are located very close to the servers of electronic trading platforms and get receive data fractions of a second before the rest, which also allows them to see before flows orders coming to markets and execute or cancel thousands of them per second in anticipation of important movements.
The benefit does not usually come from the big moves, but to get small profits per trade, but make millions of them a day . Firms that use this practice claim that can leak a few days in a week, but have never had a month in red.
Proponents argue that these systems provide liquidity to the market, because its appearance has meant tripling the volume of transactions, and that its intraday transactions does not affect the medium – term investor. However, it seems proven the multiplier effect it had during the flash crash of May 6, when the Dow Jones Industrial lost 600 points in 20 minutes. Fearing that HFT machines can cause a disaster of considerable proportions, the SEC ( Securities and Exchange Commission ) and members of the US Congress have begun to question this trading system, identify hazards and have expressed their intention to regulate and control this practice
With the aim of restoring battered confidence in markets of traditional investors.