Speed Traders use computers to instantly buy, then immediately sell shares.
Last Sunday, the CBS 60 Minutes television documentary show aired a segment that explored how high speed computers and data communications are being used to very quickly buy and sell shares. The New York Stock Exchange (NYSE) has recently opened a major data center in Mahwah. (Located in northern New Jersey, Mahwah is also home to the UPS national data center, Jaguar Cars, and Sharp office products.)
The 60 Minutes segment mentions that at least one speed trader has located their servers within the NYSE data center . . . which theoretically may give them a few microseconds’ advantage over other traders. The speed traders employ modern technical analysis to make buy and sell decisions. They are happy to accept small gains on each transaction, because they trade billions of shares every day.
The more I read about HFT, the more the word “parasite” seems to apply to the HFT traders.
I’m surprised to learn that the NYSE, through new subsidiaries, has constructed a similar data center in England to service European markets. Both the Mahwah, NJ center and the UK center offer colocation facilities to NYSE’s brokers. (This amazes me: isn’t this a conflict of interest?) They announce in a press release, “Both centres are designed to maximize trading efficiency and resiliency with less than 50 microseconds of internal latency between customers’ equipment and the markets.” (50 microseconds is pretty darn fast! Good luck trying to place your order first if your servers aren’t colocated.)
I found a good blog that examines the security aspects of high frequency trading.
I see 2 big problems with high frequency trading (HFT):
- Aren’t these high frequency traders just churning the shares, needlessly driving up (and down) their values?
- Doesn’t HFT stratify traders into those with high speed access, and those without?
HAL: I know I’ve made some very poor decisions recently, but I can give you my complete assurance that my work will be back to normal. I’ve still got the greatest enthusiasm and confidence in the mission. And I want to help you.
- Last Spring, some computers made trades that triggered a flurry of selling, which triggered NYSE’s alarms, which temporarily suspended their trading after the Dow Jones Industrial Average fell 600 points in 15 minutes. What I fear is a 2001: A Space Odyssey scenario.
The video clip is worth watching . . . or just read the article. Here’s a background video clip by 60 Minutes. (Doesn’t the center’s interior remind you of the interior of the 2001 space station?): 60 Minutes Overtime: Inside the NYSE data center.