epilogue

Ever dreamt of being a billionaire in a year or two? Well, here’s how you could… Gather a bunch of techies, make trading algos and set up shop near stock markets and electronic exchanges. Armed with high speed computers, networks and software that “sees” patterns; and a little luck, you can make it. In such recessionary times, if you are still wondering how hedge funds and Goldman Sachs are making money, well, I’ve answered your question. Welcome to high-frequency trading.

High-frequency trading is characterized by powerful computers, o fast they can outsmart or outrun other investors, humans and computers alike. These systems enable traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense. Goldman Sachs acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage. What principles and mechanisms they are use to dispute “unfair advantage” is still a mystery for me. Let alone normal investors, high-frequency specialists have a clear edge over seasoned traders.

Here is how it works: Powerful algorithms — “algos,” in industry parlance — execute 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— thus gleaning underlying pricing patterns without moving much money. Also, loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

The rise of high-frequency trading helps explain why activity on the US stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Just a handful of high-frequency traders now account for a more than half of all trades. Joseph M. Mecane says,

It’s become a technological arms race, and what separates winners and losers is how fast they can move.

On the other hand. Andrew Brooks of T. Rowe Price that does engage in high-frequency trading maintains:

You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient.

The only real-world easy to understand example I can cite to help understanding this is to look at how the Japanese are making fish extinct. The tiny island with a predominantly fish-diet consumes over 80% of the world’s fish catch. Many species are on the brink of extinction. Add technological advancement: Fishing boats are now armed with GPS devices, sonars and other technological aids to be the first to get the catch. And of course, the fish have no chance.

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