Saturday, October 23, 2010

High frequency trading

An interesting article on HFT. There are new participants in the market and we should understand them very well.

Here I extract the most important paragraphs. To read the complete version, click here. (CBSNEWS.COM)


Just four years ago, high frequency traders accounted for 30 percent of the stock trades in the U.S. Today, estimates range as high as 70 percent. And institutional traders, like Joe Saluzzi of Themis Trading LLC, have come to believe that the game is rigged. 

Today it is still the public façade of Wall Street, and a television backdrop for reporters relaying financial news.  But less than 30 percent of the trading is conducted there now, and the specialists and the noise of the floor is being replaced by the speed and quiet efficiency of computers, and the action has moved elsewhere. 
There are now more than 80 alternative trading systems around the country, plus two brand new electronic stock exchanges which most of you have probably never heard of: BATS and Direct Edge. 
They're owned by the big banks and by high frequency trading firms, and neither of them would give "60 Minutes" an interview or let us inside to film their operations, but they trade more than a billion shares a day at blinding speed, and most of those bets are being made by machines. 
The players range from firms like Goldman Sachs, Barclays, Credit-Suisse and Morgan Stanley to hedge funds and smaller operations like Tradeworx, which is the only high frequency trading firm that would talk to us or let us in. 
It's run by Manoj Narang and a small group of mathematicians and scientists called "quants," which is short for quantitative analysts. Their high speed computers trade 40 million shares every day. 

Actually, high frequency traders are getting the same market information that Saluzzi gets. They are just getting it a little bit sooner - it's only a few fractions of a second sooner, but if you are running supercomputers, Saluzzi says, it can be an eternity. 
"What you're saying is the people with the fastest computers have an advantage? They get the best deals?" Kroft asked. 
"Every time. Absolutely. There's no doubt about it. I mean, if they're spending that kind of money, and they're using that type of infrastructure, they're doing it for a reason. And it is to get a speed advantage, in that respect," Saluzzi replied. 
It's not just the speed of the super computers that's important - it's also their physical location. The closer they are to the stock exchange's server the quicker they will be able to get critical market information. 

"Do these high-frequency trades have anything to do with market fundamentals?" Kroft asked. 
"Valuation is irrelevant. It's all about just moving the price up and down the ladder all day long. Each day is new. Each day starts fresh. So, you have to question the true valuation of the markets now," Saluzzi said. 

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