High-frequency trading is a process that uses computers and fast communications to buy and sell a variety of things, normally shares, at high speed. And we mean high speed. The speed for a trade to be done in the US is at 98% of the speed of light.
The boss of a hedge fund complained that it was taking him 43 milliseconds to do a trade (a millisecond is only a thousandth of a second so a blink of the eye is 300 milliseconds). He moved his operation from Kansas to New York and cut that time from 43 milliseconds to 3.9. And in the first few days of trading after that, he'd made $450,000 of additional profit.
Whoever has the fastest cable stands to make the most money, by buying stocks and shares just as someone else is about to buy them, and then selling them on to that original buyer for a small profit.
Imagine a big institution wants to buy a million shares in a company, so one of its people presses a button on a computer to authorise that deal. Now slow down time. Imagine that the electrical signal to buy those shares, from all sorts of different places, is whizzing down a line. It knows that those shares are up for sale at all sorts of places, and they cost, say, £1 each. So you're expecting to spend £1m.
Now freeze time. Your first purchase has just landed - let's say you've bought 10,000 shares for £1 each. You're about to buy the other 990,000. But hold on... because something very sneaky is about to happen.
My computers have instantly worked out that you're buying these shares, and that you want to buy loads more of them. And because my computers are faster than yours (thanks to these super-fast fibre-optic cables) - I'm going to buy them ahead of you. And then I'm going to sell them to you at a slightly inflated price. And what's more - you probably won't even know it's happening.
So your remaining 990,000 shares might each cost you an average of a penny or two more. You might not even notice, but I've just made a £20,000 profit out of buying and selling shares within the same second.
Now imagine that happening hundreds, thousands - tens of thousands - of times a day. And whoever has the fastest cable can make the most money. It's the institutions - the pension funds and such like - who are losing money.
Remember what the text-books tell us. Stock markets are supposed to be there to help companies to grow, and not to enrich traders or marginalise all those who can't afford the latest technology.
From the BBC
The boss of a hedge fund complained that it was taking him 43 milliseconds to do a trade (a millisecond is only a thousandth of a second so a blink of the eye is 300 milliseconds). He moved his operation from Kansas to New York and cut that time from 43 milliseconds to 3.9. And in the first few days of trading after that, he'd made $450,000 of additional profit.
Whoever has the fastest cable stands to make the most money, by buying stocks and shares just as someone else is about to buy them, and then selling them on to that original buyer for a small profit.
Imagine a big institution wants to buy a million shares in a company, so one of its people presses a button on a computer to authorise that deal. Now slow down time. Imagine that the electrical signal to buy those shares, from all sorts of different places, is whizzing down a line. It knows that those shares are up for sale at all sorts of places, and they cost, say, £1 each. So you're expecting to spend £1m.
Now freeze time. Your first purchase has just landed - let's say you've bought 10,000 shares for £1 each. You're about to buy the other 990,000. But hold on... because something very sneaky is about to happen.
My computers have instantly worked out that you're buying these shares, and that you want to buy loads more of them. And because my computers are faster than yours (thanks to these super-fast fibre-optic cables) - I'm going to buy them ahead of you. And then I'm going to sell them to you at a slightly inflated price. And what's more - you probably won't even know it's happening.
So your remaining 990,000 shares might each cost you an average of a penny or two more. You might not even notice, but I've just made a £20,000 profit out of buying and selling shares within the same second.
Now imagine that happening hundreds, thousands - tens of thousands - of times a day. And whoever has the fastest cable can make the most money. It's the institutions - the pension funds and such like - who are losing money.
Remember what the text-books tell us. Stock markets are supposed to be there to help companies to grow, and not to enrich traders or marginalise all those who can't afford the latest technology.
From the BBC
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