Curb your Enthusiasm: The Dangers of High Frequency Trading

The 21st century has ushered in an era of rapid technological progress and convenience.  Everything we could possibly want can now be found at the touch of a button. Nowadays we don’t have to even leave the house in order to live life. Love, friends, money, entertainment, can be found online. Things are faster and easier.  The tech revolution has affected us all and of course Wall Street has been quick to spot an opportunity.

Enter high frequency trading or HFT. What is it you ask? Well basically…. it’s magic. And by magic I mean it is the process whereby complex algorithms, created by an army of sweaty nerds, execute precise orders at mind boggling speeds to capitalise on the tiniest movement in price. So yeah, magic.

For large financial institutions engaged in this dark art, the ability to execute thousands or millions of trades a second is a chance to earn insane profits while one upping your competitor.  The fastest trader is able to sell at the highest price and buy at a lowest, simply because he gets there first.  Some experts even claim that a connection that’s even one millisecond faster than the competitions could potentially boost firm’s earnings by $100 million per year. Sounds great but is HFT all roses and sunshine?

Um……No.  In 2012 a US firm by the name of Knight Capital lost $440 million due to an error in its code, in under one hour!.  To add insult to injury it was slapped with a $12 million fine in 2013 for its reckless behaviour. Trading at such amazing speeds and high volumes has the potential not just to ruin individual firms but also put entire markets at risk. In 2010 the Dow-Jones Industrial Average dropped nearly 1000 points and then recovered most of the losses in only 30 minutes! The power to influence the market and create unfathomable volatility makes HFT a potential weapon of mass financial destruction.

 

 

By Brian O’Toole

Filed in: Blog, Featured Tags: , , , , ,

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