The Phaserl


Mom-Pop Investors No Match for HFTs

from Wealth Cycles:

In the movie Superman III, Richard Pryor’s character launches a get-rich quick scheme by stealing the fractions of a cent left over in electronic transactions. Characters in the movie Office Space picked up the theme and made thousands. This financial chicanery, however, is no longer fictional. A trading practice known as High Frequency Trading (HFT) exploits minute changes in stock prices—most less than a penny—to garner huge profits from unfair advantages.

Essentially, HFT uses advanced algorithms to seize upon tiny price discrepancies among exchanges for profit. The algorithms also predict price movements to execute trades. For example, say Microsoft’s price has increased to $100.050 on twelve of the thirteen exchanges. On the thirteenth, however, the price is still $100.045…for a millisecond. High Frequency Trading systems would buy at the lower price and sell the moment it increases on that exchange. The trades are fully automated, performed solely by computers capitalizing on changes too fast for humans to process. HFT can and does occur with any instrument that can be traded electronically: stocks, bonds, commodities, futures and even in currency.

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