We often rail against the short-term perspective by traditional investors, especially when lean manufacturing transformations can take years. Financial horizons measured even in quarters often drives poor decision making. Now the definition of "short term" is once again being redefined by technology.
Try 30 milliseconds.
Yes, these systems actually allow a 30 millisecond "preview" at upcoming orders. A lot can happen in that tiny fraction of a second.
millions of orders a second and scan dozens of public and private
marketplaces simultaneously. They can spot trends before other
investors can blink, changing orders and strategies within milliseconds.
High-frequency traders often confound other investors by issuing and
then canceling orders almost simultaneously. Loopholes in market rules
give high-speed investors an early glance at how others are trading.
slow-moving traders went up against high-frequency robots earlier this
It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. The slower traders began issuing buy orders. But rather than being
shown to all potential sellers at the same time, some of those orders
were most likely routed to a collection of high-frequency traders for
just 30 milliseconds — 0.03 seconds — in what are known as flash
In less than half a second,
high-frequency traders gained a valuable insight: the hunger for
Broadcom was growing. Their computers began buying up Broadcom shares
and then reselling them to the slower investors at higher prices. The
overall price of Broadcom began to rise.
Soon, thousands of
orders began flooding the markets as high-frequency software went into
high gear. Automatic programs began issuing and canceling tiny orders
within milliseconds to determine how much the slower traders were
willing to pay. The high-frequency computers quickly determined that
some investors’ upper limit was $26.40. The price shot to $26.39, and
high-frequency programs began offering to sell hundreds of thousands of
$1.4 million for about 56,000 shares, or $7,800 more than if they had
been able to move as quickly as the high-frequency traders.
All in less than a second. $7,800 may not seem like much on that volume, but multiply it by thousands of stocks, and you'll realize that some decent bucks are being made.
Without any knowledge at all of what the company is about, the products it makes, and the markets it competes in. Let alone long-term strategy. Some "investment."
Mark Graban says
That sounds like something that will inadvertently cause another market crash.
I’m not one for making stuff illegal, but that practice sounds like something that should be illegal. Not a level playing field.
Mark Graban says
I can’t believe I’m agreeing with Paul Krugman, who writes on this microtrading travesty:
What I really found interesting in Krugman’s article is that he actually indicated a modicum of understanding of the value of capital markets…
“financial speculation can serve a useful purpose. It’s good, for example, that futures markets provide an incentive to stockpile heating oil before the weather gets cold and stockpile gasoline ahead of the summer driving season.”
“The stock market is supposed to allocate capital to its most productive uses, for example by helping companies with good ideas raise money.”
And hell must be freezing over as he (probably unintentionally) gives a negative view of taxes…
“high-frequency trading probably degrades the stock market’s function, because it’s a kind of tax on investors who lack access to those superfast computers”
But wait… in his mind aren’t all taxes a positive thing??