A current story on an hour was fascinating and disturbing. The greatest traders on Wall Street aren’t humans representing Brokerage Houses, but uber-speed computers. These electronic traders don’t require human intervention to complete their trades, but depend on pre-programmed instructions according to complex algorithms. The trader – within this situation the pc – doesn’t have equity expertise and doesn’t be aware of underlying worth of the businesses or their stocks. It will make a large number of decisions and execute a large number of trades within micro-seconds. Exactly what the computer lacks in fundamental understanding it greater than comprises for in rapidity of trade execution and analysis of trends.
Now some would argue this really is old news. The NASDAQ (National Association of Securities Dealers Automated) continues to be electronic and automatic for many years. In comparison, despite its prominence, the brand new You are able to Stock Market was considered a quaint equities anachronism using color-coded employees, hands signals, telephones and slips of paper. And even though the an hour piece was broadcast this year, some type of High Frequency Buying and selling (HFT) has existed not less than ten years. Obviously the sophistication from the technology and also the decisions according to mathematical models has improved tremendously.
What Is The DANGER?
At first glance this latest methodology seems superior. It’s fast, cost-effective, not vulnerable to human order-entry error, not susceptible to emotion, and facilitates trades at the perfect cost. It represents another illustration of the wonders of technology. However, as Lesley Stahl, CBS reporter discovered, high frequency buying and selling has some very vocal critics, plus some effective advocates.
The greatest condition in HFT could be the disconnect between investing according to actual (fundamental) value versus. excessive buying and selling according to ever-altering cost-points over extremely brief periods. Due to the amount of synchronized trades our prime Frequency Traders may become market makers and movers creating erratic or distorted volume and cost moves. Some blame this years “Flash Crash” on HFT. From another point of view, HFT really minimizes market volatility and it has a leveling effect since the moves in or from evolving or declining equities is really efficient.