23 November 2010
Technology Trends: High Frequency Trading
High-Frequency Trading, HFT, is a relatively recent arrival in the trading of equities and other financial instruments. HFT uses a set of computerised trading strategies to make trades in extremely short position-holding periods. This is why there are now a million trade movements per second in the London markets and up to ten million per second in the US markets.
The basis of HFT is to use low latency computing and high-speed processing to analyse massive amounts of market data. Sophisticated algorithms then exploit trading opportunities, arbitrage, that may open up for only a fraction of a second on the markets. The programs can even inspect major orders as they come in – large institutional orders for pension and mutual funds, for example – and jump ahead of the queue to skim off profits.
This is a practice known as flash trading, and is now coming under the regulator’s magnifying glass, particularly after the ‘flash crash’ of May this year.
On 6th May, US markets fell into a trillion dollar freefall. Accenture’s shares fell from $41 at 2:30 that afternoon to just one cent each by 2:47 whilst Apple’s shares soared 40,000 per cent to reach $100,000 each during the same twenty minute period. Overall, the US stock market lost 9 per cent of value before rebounding just as fast.
So, what is the current state of HFT and flash trading, and what are the real implications of such trading strategies? An esteemed panel of experts will be gathered to review and discuss.