The High Frequency Trading Debate – Take a Side:
High Frequency Trading (HFT) is a form of algorithmic trading characterized by the use of powerful computers, large volumes of shares, and fast execution speeds. We’re talking about millions of shares being bought and sold within mere seconds/milliseconds. According to some estimates, high frequency trading accounts for 60% or more of the total volume in US stocks. Those taking part in high frequency trading are large investment banks, hedge funds, and institutional investors. Some of the largest high frequency trading firms are Virtu Financial, Hudson River Trading, and Jump Trading, just to name a few.
The major benefit of high frequency trading is that it provides liquidity in the markets, resulting in tighter Bid-Ask Spreads. The major critique, however, is that this liquidity is “ghost liquidity” that is only available for one second and gone the next, which prevents retail traders from actually being able to trade it. High frequency trading also takes human decision out of the markets and could cause fast, large market movements for no apparent reason. For example, on May 6, 2010, the US markets experienced a “Flash Crash” where the S&P 500, NASDAQ, and DJIA took a trillion-dollar hit within minutes. The Dow Jones Industrial Average, specifically, experienced its largest intraday point drop ever (over 1,000 points) in about 30 minutes. A government investigation later discovered that a large algorithmic order triggered the massive sell-off.
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