High Frequency Stock MarketTrading

High Frequency Stock MarketTrading
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The stock market

The stock market was once characterized by a large room with wall-mounted monitors displaying continually changing columns of numbers. On the floor, a hectic crowd of traders and a cacophony of voices filled the space, punctuated by shouts of “buy” and “sell.” However, this picture has evolved. The room and monitors persist, but the once-large crowd has diminished significantly. In its place, quietly humming computers have taken center stage.

The traders who now monitor and control these computers operate from either their homes or offices. These computers operate at remarkable speeds, functioning tirelessly without vacations and requiring minimal human intervention. Equipped with trading programs based on mathematical algorithms—commonly known as algorithms—these computers, rather than traders, evaluate stock market rates. They have the ability to execute buy and sell orders either fully or semi-automatically.

Trading frequency

Some trading programs perform simple commands, like purchasing a specific number of stock when the price of a commodity falls below a predetermined value. Others, especially those on custom-built high-frequency trading computers, can execute complex strategies with incredible speed. These high-frequency trading programs compete with each other, striving to be faster, more flexible, and more independent.

Transactions that once took days, hours, and minutes are now executed within seconds, milliseconds, and microseconds. While high-frequency stock market constitute only a small portion of all traders, they are responsible for about two-thirds of all stock market transactions. Their basic strategy is straightforward: trade as much and as quickly as possible, capitalizing on small profit margins that accumulate to billions due to mass and velocity.

High-frequency Trading

The high-frequency trading programs must always be a split second faster than their counterparts, necessitating proximity to the stock market. The shorter the cable, the faster information can be transmitted—milliseconds matter. For instance, if the buying price of a commodity rises minimally, high-frequency trading programs can respond to the price trend before others, seizing the opportunity to sell the commodity stocks for a minimum profit per share.

While high-frequency trading may offer advantages of stock market such as increased liquidity and facilitation of pricing, it also comes with drawbacks. Some argue that it exacerbates price volatility and can be detrimental in crisis situations when high-frequency traders withdraw from the market. The impact of high-frequency trading remains a topic of controversy among market researchers.

Normal Trading

Normal traders struggle to match the speed of high-frequency traders for two primary reasons. Firstly, not everyone can afford to rent space close to the market, and secondly, they cannot always afford the specially programmed high-frequency trading algorithms. Due to more direct proximity to the stock market, high-frequency traders possess a clear information edge.

For example, quote stuffing involves a trading program making thousands of small, unimportant offers, creating a flood of information and filtering out the unimportant details. Other programs lose valuable milliseconds and respond too late to the interesting offers.

Trading Profits

Another manipulation technique is spoofing, where a trading program generates a number of overpriced purchase offers. The spoofer can then use previously acquired options bought at an unmanipulated price to make significant profits.

Controlled high-speed trading also comes with technical risks. Trading algorithm programmers note that due to the extreme complexity of the trading environment and the algorithms themselves, they are no longer able to track everything the programs do. These programs are never completely error-free, leading to problems in the interaction of various trading programs The speed with which this happens makes it challenging for humans to become aware of the threat, assess it, and intervene.

s. In addition to the already unfair advantages for high-frequency traders, these problems can have fatal consequences on the real economy and have played a significant role in stock market crashes. For instance, the first flash crash of 2010 saw the US stock market collapse within a few minutes in a way never seen before.

Unfortunately, technical progress with computerized trading has led to a wide range of risks and possibilities of manipulation, predominantly exploited by high-frequency traders. These include the introduction of automated trading stops if flash crashes occur, temporarily interrupting trading to limit damages.

Lastly, the introduction of a financial transaction tax would make high-frequency trading less lucrative and likely offset social losses on the financial markets through tax revenues.


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