High Frequency Stock Trading

For some stock traders, high frequency trading has become the quickest way to make the most money. And the more volatile the market, the more money they make. The mechanism of their trade is complex algorithms that locate inefficiencies in the market and pounce on the opportunities before you can even blink, trading tens of millions of shares before you or I could even recognize a possible deal, mush less react to it.

While high speed computers are elaborately complex computer programs looking for deals to exploit are becoming the norm around Wall Street many regulators and legislators are questioning if this kind of trading is a good thing. Thought to be responsible for the “flash crash” on May 6, 2010 when the DOW lost nearly 1,000 points in just a few minutes. Later that same day the market rallied and regained more than 600 points to close some 350 points down.

After this indecent, many regulators and other Wall Street watchers wondered just how much damage could high frequency trading inflict. Not only was the DOW down significantly, markets across the board were down that same day. The big question now is a “what if” scenario. What if this happened again, only on a much larger scale? If the DOW and other markets can lose 1,000 points in a matter of minutes, could entire business and commodity sectors be severely disrupted if their value dropped 25 or 30% overnight and stayed low for several days?

When there are volatile trading days where the market moves in a triple digit spread from highs to lows is when high frequency traders make their most money. But again, some say we are sowing the seeds of financial doom with this kind of trading being allowed in the markets. Their claim is that it is exceptionally complex and for the most part, completely unregulated. That spells disaster for politicians who love to control things and who don’t understand the simple basics of what moves the market or what makes the economy function for that matter.

Politicians are now calling for the Securities and Exchange Commission to do a ground up investigation of what makes high frequency trading tick and what it could mean for the future of the markets. It’s hard to believe the SEC could even begin to understand the complexities of trading such as this, much less be able to spot irregularities if they do exist. They weren’t even able to spot the biggest fraud in history when Bernie Madoff ripped off investors to the tune of $50 billion. Any elementary school pupil armed with a calculator could have found problems with what Madoff was doing, but not the SEC.

For the mean time, High Frequency Stock Trading is probably here to stay while our politicians at least try to figure it out.