Sunday, August 7, 2011

What is High Frequency Trading and Flash Orders?

High frequency trading (HFT) is the use of sophisticated technological tools to trade securities like stocks or options, and is typically characterized by several distinguishing features:
  • HFT is highly quantitative, employing computerized algorithms to analyze incoming market data and implement proprietary trading strategies;
  • HFT usually implies a firm holds an investment position only for very brief periods of time - even just seconds - and rapidly trades into and out of those positions, sometimes thousands or tens of thousands of times a day;
  • HFT firms typically end a trading day with no net investment position in the securities they trade;
  • HFT operations are usually found in proprietary firms or on proprietary trading desks in larger, diversified firms;
  • HFT strategies are usually very sensitive to the processing speed of markets and of their own access to the market.
The above is a standard definition found on Wiki, but the more juicy story lies in how large institutions are using the speed of technology.

The advent of the Internet has affected the trading process by causing two shifts, a shift in time and a shift in space. You can now get somewhere in less time, for example if someone wanted to book tickets for air travel you go on the site and the ticket is emailed to your phone milliseconds after you purchase. Before the Internet you called and waited for the ticket in the mail or drove to pick it up. This example also illustrates the shift in space, allowing a consumer in a remote island in Indonesia to look for tickets among competitors in Dallas Texas. This shift is not a fixed movement but rather an upward curve, and if technology giants like Steve Jobs and Bill Gates are right, the growth curve for the internet will get steeper, since they claim that the Internet is in its infancy. This means information will come to us faster and in theory we will be able to travel time and space faster.

The shift in time and space is no different in the stock exchange world, which now sees heavy volume then ever before (Source: NYSE). What has changed, well large institutions now have powerful computers set-up right next door to major exchanges offering the fastest execution of trades ever. But this is no different then before the advent of the Internet, since large banking institutions have historically stayed ON Wall Street. What is different this time is that orders to buy or sell can be placed up in nano-seconds, thus greating a demand, and pulled off in the same nano-second, thus allowing the entity placing the order to measure the exact demand for the stock. It doesn't stop there.

The speed of the Internet and advances in software programming have allowed Quantitative Programmers to insert logorithms and force movement and liquidity by placeing large Flash orders.

Flash Orders are displayed for only a fraction of a second on certain exchanges, and thus are invisible to market participants (like individual investors) who lack the most sophisticated computers. During the summer of 2009, Senator Chuck Schumer of New York was leading an effort to ban flash orders and SEC chairman Mary Schapiro was moving aggressively to "eliminate the inequity" that they cause. Flash orders account for a bit under 3% of U.S. trading volume. (Source)

Flash orders are a product of High Frequency Trading today and every investment professional should include it in thier market analysis. High frequency traders do not want to crash the market: no market, no trading, no good for high frequency traders. But, the public must know about high frequency trading. High frequency trading should be a variable in every financial analysis, yet the subjet is still taboo due to how much money wall street makes off its efficiencies. Investor beware!


The MicroCapCompany Team
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About the Author: Nicholas Coriano is a Business Consultant and Planning Guru.  He is a graduate of The University of Connecticut Business School and the John Marshall Law School in Chicago.  He has worked at Merrill Lynch, The New York Stock Exchange and as an Investor Relations Agent & Consultant to Micro Cap Companies and Penny Stocks.  He is the founder and author of The a blog focused on providing information and advice to Micro Cap Company Executives and Investors.  You can also find him blogging about Social Media, SEO, Web Development and Tech on

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  1. High-frequency trading has been the subject of intense public focus since regulators claimed these practices as contributing to volatility on May 6, 2010, popularly known as the 2010 Flash Crash, a United States stock market crash on May 6, 2010 in which the Dow Jones Industrial Average plunged to its largest intraday point loss, but not percentage loss in history, only to recover much of those losses within minutes. Another area of controversy, related to SEC and CFTC findings in its joint report on the Flash Crash that equity market "market makers and other liquidity providers widened their quote spreads, others reduced offered liquidity, and a significant number withdrew completely from the markets" during the Flash Crash is whether high-frequency market makers should be subject to regulations that would require them to stay active in volatile markets. As SEC Chairman Mary Schapiro said in a speech on September 22, 2010, "...high frequency trading firms have a tremendous capacity to affect the stability and integrity of the equity markets. Currently, however, high frequency trading firms are subject to very little in the way of obligations either to protect that stability by promoting reasonable price continuity in tough times, or to refrain from exacerbating price volatility."

  2. New article on high frequency trading out today: Computers Rule Wall Street (