High-frequency trading (HFT), where technical tools and computer algorithms are used to trade stocks at a speed that is, well, simply put, ‘silly fast’ might have seen its heyday, according to a piece in Advanced Trading.
Basically, the problem with HFT can be boiled down to this: it buys and sells stocks at a ridiculous rate, reacting instantly to sometimes minuscule changes in market prices, creating little bits of profit, but the speed means that computers are basically running the show, and they can screw up. Big time. Space Odyssey 2001-like big time.
Bloomberg Business week put it like this:
“According to estimates from Rosenblatt Securities, as much as two-thirds of all stock trades in the U.S. from 2008 to 2011 were executed by high-frequency firms; today it’s about half. In 2009, high-frequency traders moved about 3.25 billion shares a day. In 2012, it was 1.6 billion a day. Speed traders aren’t just trading fewer shares, they’re making less money on each trade. Average profits have fallen from about a tenth of a penny per share to a twentieth of a penny.”
So, lower profits, less trades (still stupidly many). Add the fact that law makers are looking at ways of taxing these trades (a really hard job) and we might have seen the end of HFT….or at least until someone in the market invents a computer-like warp drive and then they’ll be at it again.
What I mean is that markets today are a breeding ground for new technology and innovation that used to happen in places like MIT or NASA, so don’t be surprised if someone figures out that the answer isn’t to slow down, but speed up to a pace where no-one else can keep up.