High Frequency Trading on Wall Street
Technology continues to march forward on Wall Street. It seems as if the markets are now dominated more by machines than by humans. According to some industry pundits, algorithmic trading and high frequency trading now accounts for anywhere between 50% and 80% of all US equity volumes.
This has brought about a whole new set of risks. The potential danger of one of these systems running out of control, going haywire and bombarding the markets with millions of orders per second, is very real and could have disastrous consequences for the world’s financial systems.
There are many types of algorithmic trading systems and strategies used by proprietary trading firms. Some systems “scrub” news stories to look for news and events that might move a particular stock. Other systems are “non-directional”, looking for price discrepancies and capitalising on their speed of execution to arbitrage those opportunities.
What is getting some people worried is the speed at which these systems can generate and execute orders, and the volume of throughput they can handle. Orders can now be generated, sent to an exchange, executed and reported back in less than a millisecond (a thousandth of a second). And multi-processing, high-throughput parallel processing technology allows for millions of such orders to flow through the exchanges systems.
But just because the technology allows high frequency trading to take place, doesn’t mean that all the controls are necessarily in place to prevent errors occurring. With increased speed and increased throughput comes increased risk. It is this risk that the regulators are now trying to get their heads around.
What happens if one of the machines does go haywire? And is the integrity of the markets threatened by the fact that only the biggest players have the fastest technology? Are those big players “fleecing” smaller investors?
The regulators have a tough job ahead. Only time will tell whether they are able to introduce controls that benefit all.
