Computers Rule Wall Street
Did computers give the market motion sickness? – Aug. 12, 2011.
It’s not fast-talking traders on the New York Stock Exchange behind the action. The majority of trading is done on large server farms based in New Jersey and elsewhere.
High-frequency trading, also known as algorithmic or programmed trading, relies on software to determine when to buy and sell shares, usually based on a particular pattern or technical level in the market. These trades can happen several times a minute.
High-frequency trading makes up 53% of all trading in U.S. stock markets, up from 21% in 2005, said Larry Tabb, president and CEO of market research firm Tabb Group. Other estimates put it even higher, at around 65%.
Gary Wedbush, executive vice president and head of capital markets at Wedbush Securities, told Bloomberg News on Friday that more than 80% of the firm’s orders since Aug. 1 have come from high-frequency trading clients, at five times the typical volume.
The Securities and Exchange Commission in a report blamed high-frequency trading in part for the May 6, 2010 “flash crash,” when the Dow fell nearly 1,000 points in minutes.
NeilS — Given the recent market volatility and the general feeling that the “new normal” will be sudden and knee-jerk swings in the major markets, I thought it would be interesting to reveal the statistics on the increase of high frequency trading. I have been a professional trader in the U.S. treasuries market for 8 years and I have witnessed the change first hand.
There was once a time where being a small, professional trader was seen as a somewhat noble profession. Collectively, the smaller non-institutional traders were liquidity providers. If a large bank, mutual fund, or hedge fund wanted to move a large position, the smaller traders would help provide liquidity, and then disperse the position over time. This allowed for more reliable and better functioning markets.
Now, all the major institutions still standing after the financial crash are vying for top trading spots by using high frequency algorithmic trading systems. The end result is much higher volatility and market movements not based on reason or logic, but on the ability to generate money as quickly as possible. Unfortunately, this behavior is not going to go away soon and the every day investor needs to tighten their belt and brace for the “new normal” of potentially violent swings in the market.