Wall Street: The speed traders

Wall Street: The speed traders
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Tradeworks computers don’t care about a stock’s future trajectory; their objective is to be in and out of a stock within minutes, making a profit of a penny or less per trade. The computers analyze real-time data and make decisions based on current market conditions and statistical analysis of past performance.

High-frequency traders, including Narang, instruct their computers to execute profitable trades on a massive scale by scanning different exchanges and anticipating the likely direction of individual stocks in the next fraction of a second.

Narang demonstrated the process with a simple hypothetical example used for demonstration purposes.

Stock Market

I am going to test a strategy: if a stock experienced a 5% decrease for the past week, I will buy five dollars of that stock. Conversely, if a different stock increased by 10% last week, I will sell ten dollars of that stock. I will apply this strategy simultaneously to every stock in my tradable universe, which consists of over 4,000 stocks, approximately 4,500 to be precise. This strategy, feasible only with a high-speed computer, would yield almost as many losing trades as winners. However, over the past eight years, it would have generated a tidy profit. This is a trend that Manoj Narang and other high-frequency traders have become accustomed to.

Narang acknowledges that there have been a few consecutive days where they lost money, but they have never experienced a losing week or month so far. Five years ago, high-frequency traders accounted for 30% of stock trades in the U.S., with recent estimates suggesting that this figure has risen as high as 70%. Making money consistently day after day, as some firms claim, raises suspicions about having access to exclusive information. Saluzzi argues that high-frequency traders are getting the same market information as others, just a few fractions of a second sooner. While it may seem insignificant, with supercomputers involved, this time advantage can be significant.

Trading advantages

The advantage isn’t solely about the speed of the supercomputers; their physical location also plays a crucial role. The closer they are to the stock exchange’s server, the quicker they can obtain critical market information. Larry Leibowitz, the COO of the New York Stock Exchange, believes that their massive data center in Mahwah, New Jersey, will help the exchange regain market share lost to electronic trading platforms. This co-location service, for which high-frequency traders pay tens of thousands of dollars a month, includes almost instantaneous access to raw data from the exchange.

He argues that most small investors don’t care about pennies when buying and selling stocks; they are in it for the longer haul. However, critics, like Saluzzi, believe that high-frequency trading raises concerns about fairness and transparency. He accuses high-frequency traders of engaging in predatory behavior, exploiting their technological advantage to extract money from the market without adding any value.

Regulators and lawmakers, such as former Senator Ted Kaufman, express concerns about the lack of transparency and the potential for market manipulation.. He acknowledges the challenges faced by financial regulators in monitoring technology that has outpaced their ability.  FCC Chairman Mary Schapiro has proposed rule changes to track and identify high-frequency trades, considering additional measures to address concerns.



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