This article was written by Phin Upham
High frequency trading is a relatively new term to spring up in Wall Street. These traders use several powerful computers, armed with complex algorithms, to make an analysis of multiple markets simultaneously. The goal is to assess conditions for a profitable trade and execute as fast as possible.
These systems typically trade in volume. There are some estimates that place almost half of all volume transactions as belonging to high frequency traders. High frequency traders typically have an advantage over those who trade slower.
These kinds of traders are accustomed to moving in and out of a trade very quickly, sometimes competing for a fraction of a cent in profits. These firms typically don’t hold their portfolios for very long (overnight is almost unheard of in HFT). The margins are lower, but the volume of trading makes the concept worthwhile for investors.
Volatility is assessed via algorithm, which can be a serious risk. In 2010, there was a small crash dubbed “The Flash Crash,” in which HFT was blamed for a short but sudden decline in stock. As the algorithms detected a rise in selling, they began to follow suit. It was like watching the market cannibalize itself for five minutes. The market did recover, but it was a valuable insight into how HFT can affect an otherwise healthy or normal market.
HFT is controversial, with some arguing that it lowers the cost of retail stocks for investors.
About the Author: Phin Upham is an investor at a family office/hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media & Technology group. You may contact Phin on his Phin Upham website