High Frequency Trading

With the anniversary of the May 2010 “flash crash” coming up, high frequency trading continues to be a somewhat controversial topic, with proponents pointing out that any major shift in investing tends to unsettle investors and traders, and critics voicing concern that nanosecond trading could bring the whole system to its knees. On May 6, 2010, at 14h42 EDT the Dow Jones industrial average plummeted by 600 points in just 6 minutes before rebounding by 15h07. It was the index’s most volatile intraday activity in its 114-year history and high frequency trading is thought to have been the trigger.

While the infamous flash crash was very public, a recent study notes that similar “flash” events happen all the time, but the speed with which they happen doesn’t even register on regular market records, bringing into question the stability of markets that are increasingly making use of this hi-tech method of trading. In an analysis of stock market trading data gathered over a five-year period between 2006 and 2011, it was revealed that as many as 18,520 crashes, rebounds and spikes occurred below 950-milliseconds – a rate that is too fast for human traders to respond to.

The report went on to note that these ultra-fast occurrences were completely different from market patterns observed at lesser speeds. In an interview, co-author of the report, Neil Johnson, pointed out that “there’s this whole world below 650 milliseconds”, going on to say that “It’s an enormous part of the market which is out of human reach.”

Certainly, the technology of today is much different from the vision most people still have of Wall Street style stock market trading, with a crowded trading floor, buzzing with excitement as trading boards light up, traders shout and fortunes are gained and lost. This all changed once the US Securities and Exchange Commission gave the go-ahead for the first electronic exchanges in 1998, and today computer programs facilitate up to 70 percent of all equity trades. Some of these trades permit human intervention, but the majority take place at speeds beyond human comprehension, let alone human intervention. Add to this the fact that stock market trading is a global game, and there are a host of potential pitfalls, or potential benefits, that could result from high frequency trading.