High speed trading is the style of algorithmic trading. This trading uses complicated technological tools, mostly computers that are extremely powerful. These computers are programmed to perform commands at very high speeds and carry out numerous orders all at once (Seven Pillars Institute, 2014). This trading employs complex algorithms to analyze a number of markets carefully a number of markets. It then implements commands in relation to the prevailing market conditions. Those traders who are fastest in their speeds of execution earn more profits than the traders with low execution speeds.
High speed or frequency trading accounts for almost above 50% of the volumes of trade orders according to a survey conducted in 2009 (Wharton University, 2014). Firms that are involved in high speed trading make millions by trading with incredibly low profit margins but selling or buying in bulk or high volumes. This trading is a quantitative trading strategy. This means that it is the volume of what the company is trading irrespective of the amount the shares are valued at.
High speed trading is differentiated from other types of trading as it involves short periods of the portfolio holding. All decisions pertaining to portfolio allocations are carried out by quantitative models that are highly computerized. The secret behind the overwhelming success of high frequency trading is that, unlike humans, computers are able to process mass volumes of information concurrently (Bunge, 2011). Analysts and members of the financial industry have argued that high frequency trading makes investing and trading less costly for other participants of the market. On the other hand, high speed trading creates market volatility and costs institutions as well as individual investors billions due to losses.
It has an impact primarily on all players of the exchange market. Machines are able to trade in the stock markets in milliseconds and high frequency traders take this opportunity and use it to gain millions of shillings before other investors in the market get access to the stock market prices (Wharton University, 2014). Exchange is particularly affected by high frequency trading because these firms enjoy a lower rate than the other market investors. This is made possible by their fast computers which process the buying and selling of large volumes of stocks.
Even when the difference is cents, these firms still make millions before the market rate is out to other stock investors to make their purchases. The fact that high speed trading places firms at a better position than others is a bad trading practice that makes it look illegal and investigations are currently underway. Especially in those times that there are various fluctuations of up and down of stock prices, the exchange rate is affected and this is the times when the firms that employ high speed trading make lots of money. This hurts the other normal investors in the market.
Most investment banks are involved in the method of high speed trading. These investment banks earn their profits out of the small discrepancies in prices by buying or selling in large volumes (Seven Pillars Institute, 2014). These investment banks are the some of the notable gainers in this trade. Investment banks, therefore, should play the role of engaging in a healthy competition with other players in the business rather than using a high speed trading technique to earn profits on their own.
Individual investors are at crossroads with high frequency trading. This is because they gain and loose at the same time. To their disadvantage is that unlike machines, the speed of individual investors to execute a purchase or sale of a share is slower which makes them lose in most if the instances (Bunge, 2011). Lack and inability to process multiple transactions simultaneously even in bulk is another challenge that individual investors have to deal with in the market with high frequency trading. This leads to unfair competition as well as equity imbalance.
However, individual investors benefit as a result of high speed trading. Market efficiency is enjoyed as a result of this trading.This is because investors become satisfied with the prices as they have incorporated both the non-public and public information. The individual investors also enjoy market liquidity as a result of high speed trading, by ensuring that when one desire to trade, both a buyer and seller are available. Putting these factors into consideration, individual investors gain as well as losing and only a reflection in the real business can explain the effect of each.
The resolution to this high speed trading challenge is highly dependent on the benefits versus detriments that it causes to all players in the stocks market across the globe. With the numerous advantages of always maintaining stocks volatility in the market and making it easy for firms to trade even in large volumes at minimal price differences, high speed trading is becoming a highly preferred way of trade in the stocks (Bunge, 2011).
In addition, the embracing of technology by firms and the stock markets in using computers that are fast and are fitted with quantitative software is that the aid them in calculations and analysis is a great step and a huge stride in the stock market across the globe. For example, when a computer identifies an exchange quote which is one percent higher than the original quote, it trades the currency or stock in large volumes. It takes advantage of the one percent as well as the milliseconds it uses to process so as to make profits. This only indicates how fast and convenient it is to trade and make money when using high speed trading process (Wharton University, 2014).
However, some firms are using it to take advantage of fast and easily accessible information thus having an added advantage over others. This makes this form of trading unethical and institutions of justice are investigating on the legality of this practice. In equal measure, investors who are not conversant with the use of high frequency trading style, as well as individual investors, stand losing more if the style of trading is not controlled. This is because, when large quantities of stocks of a particular company are traded all at once, the share price of the company tends to stabilize or in other circumstances fall in value. This makes it hard for the individual investors to fully sell their shares or still in the worst case scenarios loose all their investments in the stocks (Bunge, 2011). This edged them out of the market unfairly.
References
Bunge, J. (2011). Does High Speed Trading Hurt the Small Investor? The Wall Street Journal, 1.
Keppler, D. J. (2011, Jan 1). Impact of High Frequency trading on Day Traders. Retrieved April 2, 2014, from http://traderkingdom.com/trading-futures-education-topics/trading-futures-basics/1246-impact-of-high-frequency-trading-on-day-traders: http://traderkingdom.com
Seven Pillars Institute. (2014, April 2). High Frequency Trading. Retrieved April 2, 2014, from http://sevenpillarsinstitute.org/case-studies/high-frequency-trading: http://sevenpillarsinstitute.org
Wharton University . (2014). Knowledge @ Wharton. The Imapct of High-frequency Trading: Manipulation, Distortion or a Better Functioning Market , 1.
