What Does High-Frequency Trading Mean For Your Average Investor?
Friday, September 21, 2012
In Olympic track and field, a tenth of a second can mean the difference between the gold and the silver. But on Wall Street, mere milliseconds separate the winners from the losers as a result of a technological advance that has fundamentally changed how the market operates.
So-called "high-frequency traders" use algorithms to make tens of thousands of trades a day. They may only earn a fraction of a cent on each trade, but the high volume means they can earn millions.
Recent snafus have raised concerns that this newfangled, computer-based trading is risky.
In August, brokerage Knight Capital lost $440 million in 45 minutes when its new trading software malfunctioned shortly after the market opened, and just this week there was a brief plunge in oil prices pegged to high-frequency trading.
Slip-ups like these prompted the Senate Banking Committee to hold a hearing Thursday into whether the practice is hurting investors and whether it needs to be regulated.
This week on WNYC's Money Talking, contributors Joe Nocera of The New York Times and Rana Foroohar of Time explain what this means for the average investor and what it says about the purpose of the market.