One of the newer terms in the stock market is called High Frequency Trading or HFT
HFT is computerized trading of stocks, employing high speed computers to analyze market data and using algorithms to utilizing trading opportunities.
An algorithm is a set of rules for solving a problem in a finite number of
steps…these rules are fed into a computer to determine and take advantage of tiny fluctuations in the market or a particular stock …………..and initiate a trade to pounce on that tiny fluctuation.
Back in the day, brokers and financial analysts preached the virtue of buy and hold. In the late 90’s, the day trader was born…………basically a single individual who began the trading day with no holdings and tried to end up in the same position by the end of the day, hoping to profit on several completed transactions.
High frequency trading is like hundreds of day traders on steroids,
characterized by computers searching for trading opportunities that may exist for a couple of hours…or even just a few seconds.
High frequency trading algorithms work with any financial instrument that can be traded electronically.High frequency traders compete with other high frequency
traders, for very small, and very consistent profits….sometimes a fraction of a penny on each trade, but when multiplied by thousands and thousands of computer-generated trades….can and does add up to to millions of dollars.
Traders and regulators disagree on whether HFT helped to create or to stabilize the brief but dramatic market crash last May 6th.
CME Group, a large futures exchange, stated that its investigation had found no support that HFT was related to the crash, and actually stated it had a market stabilizing effect
A contradictory report by the U.S. Securities and Exchange Commission stated that the actions of high-frequency trading firms on May 6th contributed to volatility during the crash.
So is HFT good for the market and investors or is it bad? Right now, there are as many opinions on either side as there are grains of sand on the beach….
……….but I wouldn’t be surprised to see the Feds someday slap a one penny per transaction tax on all trades, which if enacted, would send High Frequency Trading the way of the dinosaurs.