High frequency traders
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Transcript of High frequency traders
{
High-Frequency Traders
New insiders on Wall Street ?
Carmen Badali , Peter Sidhu, and Pierre Urier-Cattoire
{4 months on Investopedia~ $66,000
A Trading Experience
{
Introduction
The advantages of HFT
The disadvantages of HFT
Summary, Recommendations and Conclusion
Outline
{A question that sometimes drives me hazy: am I or are the others crazy?
Albert Einstein
Introduction to High-Frequency Trading
{Because racing is about being the fastest
The advantages of HFT
France, 12th century: courtiers de change, the first brokers Traders have always tried to be the fastest 1998: HFT is proposed by Bernie Madoff in front of the SEC 2010: 70% of trades in the US, 2% of traders
Quick timeline
{
The New-York Times: “Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.”
“The fair evolution of competition on financial markets” by Goldman Sachs and others
Greater liquidity
{Price discovery
Reduction in market volatility
Economies of scale in trading (order latency)
Pros of HFT for short term positions
Brings volume and liquidity to markets
The advantage of microseconds over milliseconds/seconds
Reducing commission prices
Reduce risks
Reduce bid/ask spread “Fill the gap”
Enhancement of competition
{Bombing the market
The Disadvantages of HFT
Programmed algorithms beyond human control
Flash Crash
Unfair advantages through flash trading, computer technology
Lack of transparency – public doesn’t have fair access to information
Dark pools
Regulations and standards for high-frequency trading lackingThe disadvantages of
HFT
A large single trade by a financial company triggered algorithms to buy and sell simultaneously, which sent stocks into a spiral beyond control.
Investigations by the U.S Securites and Exchange Commission concluded that at this time the market is too fragile and fragmented to handle such technology
There is the speculation that a crash could happen again in the future, but may not repair itselfFlash Crash – May 6,
2010
Flash Trading – component of high frequency trading
High-speed trades that give a group of high-frequency traders trading information a in advance before they are entered into the entire market to be filled
Provides unfair advantage to only a handful of investors with access to the technology, or ability to pay for it
Unfair Advantages
Advantages given to flash traders creates a two-tiered market in which a certain class of traders can unfairly exploit others
Dark Pools – Large groups of stocks connected to other networks, which allow traders to move shares through flash trading without announcing the transactions on the open market
Provides ability to anonymously trade, making it difficult for the public to get accurate prices
Traders involved receive an advanced preview of the intentions of larger investors before the public
Lack of Transparency
Hard to see who the high frequency traders are, what they are trading, and when they’re doing it
Regulators and Investors are losing faith in the trading system, unsure of accuracy
It is still questioned whether it’s the high-frequency trading that’s unstable, or the algorithms
Regulations and Standards for HFT lacking
{The world as we knew it
Summary, Recommendations and Conclusion
1. HFT causes volatility when it trades
2. HFT causes volatility when it DOESN’T trade
3. HFT generates massive amounts of profit for financial institutions
4. Technology gives HFTs an unfair advantage over individual investors and institutional investors
5. HFTs who use direct feeds can “predict the future” a few milliseconds in advance, or “anticipate” investor ordersStatements made about
HFT
{ {Pro’s
Greater Liquidity Decreased
Latency Periods Price Discovery Reduction in
Market Volatility
Con’s
Unpredictable Consequences of Algorithms / Too Risky, Ban It
Lack of Regulation and Transparency
Vacuuming up Pennies – Money, not Value
Flash Trading Unfair Technological
Advantage
HFT Summary
{High-frequency traders are not Wall Street insiders; instead they provide a valuable service as the new market makers. High-frequency trading should not be banned.
Recommendations And Conclusion
Questions?