Super-Computers Rack Up Big Profits on Wall Street: Report
Jul 27th, 2009 • Posted in: News But is high-frequency trading unfair to investors without the electronic edge?
NEW YORK
There’s a new ethics wrinkle to stock trading, reports the New York Times: the use of extremely high-powered computers to scan the market, analyze trends, and place orders with lighting speed — a power the individual investor cannot hope to match.
The Times’s Charles Duhigg notes that regulations were altered to allow computer-generated trades, but that the ordinary user of a PC cannot hope to compete with Wall Street’s computers: “Powerful algorithms — ‘algos,’ in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.”
“High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously,” Duhigg continues. “Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.”
The ethical issue: While some big companies are making billions of dollars through high-frequency trading, defenders say that if we want to encourage innovation, we have to reward the innovators. Critics, though, say that if we move toward a two-tiered market of high-powered investors and everybody else, the average investor may not feel he or she has a shot at getting a fair deal.
Source: New York Times, July 23.
For more information, see: Related Newsline story, July 6 – Related Newsline Commentary, June 15 – Related Newsline story, June 15 – Related Newsline story, May 25 – Related Newsline story, May 25.
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