High transaction tax and proposed regulatory curbs on HFT trading threaten to take the sheen off algo trading.
Here’s a little trivia to begin with. Do you know much time does it take for the human eye to blink? Don’t blink at this question! The answer is: 1/10th of a second. And given that 1,000 milliseconds make for a second, a blink takes 100 milliseconds. Most humans blink about fifteen times a minute, or every 4 seconds. Now, if someone were to ask you what’s faster than an eye blink, what would your answer be? Blinked again! It’s called high-frequency trading (HFT). Driven by sophisticated computers with complex mathematical models, HFT is a subset of algorithmic trading that involves executing thousands of buy-sell orders in milliseconds to exploit decimal differences in the price of any asset across financial markets. Firms engaged in trading are doing their transactions in microseconds (one- millionth of a second) and nano-seconds (one billionth of a second). Though not all algorithmic trading is high-frequency, all high-frequency traders do use algorithms.
In his book, Flash Boys, author Michael Lewis succinctly describes what HFT is all about. “The US stock market now trades inside black boxes, in heavily guarded buildings in New Jersey and Chicago. What goes on inside those black boxes is hard to say — a ticker tape that runs across the bottom of cable TV screens capturing only the tiniest fraction of what occurs in the stock markets. The public reports of what happens inside the black boxes are fuzzy and unreliable — even an expert cannot say what exactly happens inside them, or when it happens, or why.”
The black boxes mentioned are servers placed by traders closer to the US exchange’s trading platform. The book’s plot reveals how certain traders get their servers placed strategically close to the main exchanges to receive trading orders a split second ahead of the rest of the market and use complex algorithms to make profits.
This story is from the September 30, 2016 edition of Outlook Business.
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This story is from the September 30, 2016 edition of Outlook Business.
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