You may think it's not worth the effort, but certain investors who have been in the news do. Using super-fast computers, high-frequency traders in effect bend down to pick up pennies lying about in the stock market — then do it again, sometimes thousands of times a second.
More than a week after the Dow Jones industrial average fell nearly 1,000 points, its biggest intraday drop ever, regulators still are sifting through buy and sell orders to figure out what sparked it. One big focus is orders placed by high-frequency traders, or HFTs, and for good reason. These quick-buck firms barely existed a few years ago but now account for two-thirds of all U.S. stock trading.
In other words, all of those TV pictures of the stately New York Stock Exchange building on the evening news are an illusion. The real action on Wall Street is far away in Kansas City, Mo., and in New Jersey, in towns like Carteret and Red Bank, where HFTs named Tradebot and Wolverine and Tradeworx ply their trade.
High-frequency trading firms, which number more than 100, use computers programmed with complex mathematical formulas to comb markets for securities priced too high or too low because traders haven't had time to react to the latest data. The computers then buy or sell in a split second, locking in a profit.
The opportunities seem hardly worth noting — not just fleeting but also small, often a penny or less.
But those pennies can add up to a lot, enough to draw the attention of Goldman Sachs Group Inc., the giant Chicago hedge fund Citadel Investment and other big firms. In recent years they've paid hundreds of millions of dollars for stakes in high-frequency trading companies.
The money has stoked what was already fierce competition among the firms for a leg up.Time is of the essence
To spot opportunities and act on them before others, HFTs constantly hunt for faster computers. They also locate themselves close to the big exchanges' data centers. That can cut their trade times by milliseconds.(2 of 2)
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