Tags: HFT | firms | trade | floor

Without High-Frequency Trading, the Market Would Collapse

By    |   Friday, 04 Apr 2014 07:56 AM

Questions are once again being raised about high-frequency trading (HFT). These traders buy and sell quickly, often holding stocks for just a few milliseconds. They also rarely lose money because they are buying to fill orders entered by regular customers like us and selling to us for a few cents more than they paid.

To many people, the activities of HFT sounds like it should be illegal. To experienced Wall Street professionals, HFT firms sound like they are doing the job old floor traders once did.

Years ago, stocks traded in eighths, with prices moving up or down at least $0.125 cents at a time. Floor traders were making that eighth, and being a floor trader was a profitable business. To save individual investors money, the exchanges now trade stocks in penny increments and the price can move up or down a penny at a time. In theory, this saves individuals money, but the floor traders abandoned the business because they couldn't cover their expenses at that price.

HFT firms have filled the void left by market makers and they are providing liquidity to individual traders for significantly less money. Individual investors are saving money because they are paying a penny, or sometimes less, for this service instead of $0.125 like they did 30 years ago.

If we demonize HFT firms and they are forced out of the market, there will be a less-efficient market. Instead of having someone take the other side of my trade whenever I want to buy or sell, I could be forced to wait minutes or hours for the execution of my small market order. If prices moved against me while I waited for someone to take the other side of my trade, I could lose hundreds of dollars on a small order.

Before we get angry at HFT firms, we should understand what they do. If we get rid of HFT firms, we should have a plan to replace them in a way that keeps trading costs down. Acting hastily against HFT could create many problems in the stock market and we could all end up paying more to trade.

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MichaelCarr
Questions are once again being raised about high-frequency trading (HFT). These traders buy and sell quickly, often holding stocks for just a few milliseconds.
HFT,firms,trade,floor
356
2014-56-04
Friday, 04 Apr 2014 07:56 AM
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