HERE TO STAY? HIGH FREQUENCY TRADING INTRODUCTION: WHAT IS ‘TRADING’? -Markets: NYSE, NASDAQ...

H E R E T O S TA Y ?

HIGH FREQUENCY TRADING

INTRODUCTION:WHAT IS ‘TRADING’?

-Markets: NYSE, NASDAQ-Companies sell their equity/debt to investors on markets (“check markets”: http://finance.yahoo.com/)

WHAT IS HIGH FREQUENCY TRADING (HFT)?

• Types of HFT:Rebate Trading Filter Trading Statistical

Arbitrage Characteristics/ Definition

(Refer to example below)

Monitor for stocks showing significant movement

Seek pricing differentials between correlated markets and securities

Example Rapidly offer sell after posting bid to buy shares

News stories trigger rapid algorithm buys

Correlated stocks like Pepsi and Coca-Cola

Marketing Making

Momentum Trading

Technical Trading

Characteristics/ Definition

Regulatory exemption to reduce spreads by creating market liquidity

Similar to Filter Trading

Find technical steps based on historically repeating patterns

Example Designated market makers (DMMS) obligated to maintain order in market by adding liquidity

Filter Trading with Rebate Trading style

Tracks stocks crossing 5-day moving average

RELEVANCE:WHY SHOULD YOU CARE?

If HTF is beneficial for economic growth and financial success,we should support it

If HTF is detrimental to economic growth and financial success,we should reject it

ADVANTAGES

• 1. Robustness-easily implemented on large scale: over 5 yrs, traders using HFT has doubled

• 2. Efficiency-speed and reduced overhead: “human hand... outclassed… by machines operating in

milliseconds)

• 3. Profits-maximized: ($2.7 bil profits in 2007)

DISADVANTAGESTRIANGLE OF RISK

1. Investor

2. Compan

y

Risk

3.Market

DISADVANTAGESILLEGAL ACTIVITY

-High velocity of HTFenables elusive crime

CONCLUSION:HERE TO STAY

QUESTIONS?

REFERENCES

 • "Findings Regarding The Market Events of May 6, 2010." SEC. SEC, 30 Sept. 2010. Web. 9 Oct. 2013.

<http://www.sec.gov/news/studies/2010/marketevents-report.pdf>.

• Finger, Richard. "High Frequency Trading: Is It A Dark Force Against Ordinary Human Traders And Investors?" Forbes. Forbes Magazine, 30 Sept. 2013. Web. 9 Oct. 2013.

• <http://www.forbes.com/sites/richardfinger/2013/09/30/high-frequency-trading-is-it-a-dark-force-against-ordinary-human-traders-and-investors/>.

• "How Dangerous Is Algorithmic Trading?" TechRadar. N.p., 8 Oct. 2011. Web. 9 Oct. 2013. <http://www.techradar.com/us/news/world-of-tech/are-pcs-to-blame-for-the-financial-mess-we-re-in-1031898/2>.

• Philips, Matthew. "Knight Shows How to Lose $440 Million in 30 Minutes." Bloomberg. N.p., 2 Aug. 2012. Web. 11 Nov. 2013. <Knight Shows How to Lose $440 Million in 30 Minutes>.

• Philo, Eric S. "High-Frequency Trading Profits Crushed ... but Danger Remains Unchecked." 247wallst.com. 24/7 Wall St, 24 Mar. 2013. Web. 12 Nov. 2013. <http://247wallst.com/investing/2013/03/24/high-frequency-trading-profits-crushedbut-danger-remains-unchecked/>.

• Rogow, Geoffrey. "Rise of the (Market) Machines." Wall Street Journal (WSJ). N.p., 19 June 2009. Web. 9 Oct. 2013. <http://blogs.wsj.com/marketbeat/2009/06/19/rise-of-the-market-machines/>.

• Rowley, Brandon. "The World of High Frequency Trading." T3 Live, 2011. Web. 12 Nov. 2013. <http://historysquared.com/wp-content/uploads/2011/02/clip_image0012.png>.