What is “High-Frequency Trading”, and How Does It Distort the Markets?

Joseph Saluzzi – partner and co-head of equity trading for Themis TradingThemis – gives a succinct and stunning explanation of high-frequency trading.

This is a topic that professional stock traders know a lot about, but the public knows nothing about.

Saluzzi explains that 70% of the volume in the stock markets are from computer program trading.

The program traders make money from making trades, regardless of whether stocks go up or down.

Specifically, the program traders collect an average of a quarter of a penny per share every time they buy. Even if they sell it at same price a fraction of a second later, they make another quarter of a penny when they sell. Over billions of trades, this adds up to real money.

The program traders claim that they are providing liquidity for the markets. But they aren’t. They’re simply providing volume (remember, 70% of the volume in the stock markets are from computer program trading). This distorts basic information about the markets, and confuses real investors’ view of what is going on.

But when things are truly bad in the markets, the high-frequency traders will probably pull out of the market until things come down. So when it counts, they will pull out of the market, withdrawing liquidity.

The New York Stock Exchange, Nasdaq and other big stock exchanges rent space on special servers for the program traders, so they make money from this.

Saluzzi says that one way to curb this manipulation and distortion of the markets is to force program traders to wait 1 second between buying and selling a stock. In their make-believe world, a second is an eternity . . . so forcing a 1-second delay would reduce the attraction and profitability of program trading.

Watch the 8-minute interview.

Goldman Sachs is by far the largest program trader in the market, twice as large as the next biggest.

Remember, Saluzzi is talking about a legal trading activity – an activity which is known and accepted among traders and regulators. He is not even talking about other types of programs which can manipulate the market in even more dramatic ways.

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  • http://Anonymousnoreply@blogger.com Anonymous

    Sure the big players have the resources and the tools to work the market. So what? Does anybody believe to make money by buying stocks?

  • http://Anonymousnoreply@blogger.com Anonymous

    this kind of high frequency 'horse shit' isn't fooling anyone. it creates the 'illusion' on television and the bullshit stock market ticker that the market is still viable and 'live' but in fact, all of the smart investors got the fuck out a long time ago, and what you're really seeing is the plunge protection crap kicking in, and artificial trading that has no basis in reality. the net result is the same as a fisherman, baiting a hook and dropping it into his toilet at home. he has no more expectation of catching anything but a goddamned 'scupper puppy' (turd) than you or I have of wrestling the end of a rainbow down to the pot of gold.so, as much as this sounds quite diabolical, people who know what's going on are not in the market, have gotten out a long long time ago, and what you're seeing is another street corner 'shell game' to lure only the most pathetically stupid and brainwashed assholes into losing their money. believe me, nobody in their right mind is in this fucking market. I'm serious!

  • http://preview.tinyurl.com/lroasc Don Robertson

    "Believe me, nobody in their right mind is in this fucking market. I'm serious."Yes, yes, indeed. A bounty should be posted on those who proffer otherwise.I can only measure the veracity of this frustration-inspired test of the truth of it all -against the tremendous trend-pressure of an overall ignorance, stupidity and illiteracy that seems much the norm, -and perhaps more to the point- the prevailing trend in all western society.Accepting any of the norms of our society is just as irrational as playing the market. It has always been that way on Wall Street. It is surely worsening today, but only because money is notably tighter.Among ourselves, we might better question the ability of anyone posting on the Internet to -measurably or immeasurably- affect any change to the avalanche of trends leading directly toward an even more ignorant, more stupid and more illiterate population of the cigarette-smoking monkeys that now are the voting majority, -and the market drivers.In this world, -unfortunately, or fortunately- -depending on your perspective-, nothing matters but the direction of the mindless stampede de jour.Keep your head down. Here they come again.The best advice to those who think there is anything rational about this human world, -is that they should simply dig themselves a little hole in the ground -to crawl into- and hide themselves in the shadows of it.-and then wait and pray someone is kind enough to come along and bury us alive in it.That's the only rational choice left. Others will try and tell you otherwise. But believing any of them is less possible proportionally to the extent of our education.The end will come. When it does, we can stop idly reasoning.

  • http://whichuniversitybest.blogspot.com/2008/12/us-specialty-ranking-finance.html Finance

    High-frequency trading will improve market liquidity as there are always buyers or sellers available in the market when the investors want to trade.

  • http://Anonymousnoreply@blogger.com Anonymous

    Agreed w/ Finance.High frequency trading improves market liquidity. Saluzzi is a hack and is just grumpy because no one wants to pick up the phone anymore to trade.

 

 

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