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High frequency traders


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  • 1. High-FrequencyTradersNew insiders on Wall Street ? { Carmen Badali , Peter Sidhu, and Pierre Urier-Cattoire
  • 2. A TradingExperience { 4 months on Investopedia ~ $66,000
  • 3. {
  • 4.  Introduction  The advantages of HFT  The disadvantages of HFT  Summary, Recommendations and ConclusionOutline
  • 5. A question that sometimes drives me hazy: am I or { are the others crazy? Albert EinsteinIntroduction to High-Frequency Trading
  • 6. { Because racing is about being the fastestThe advantages of HFT
  • 7. Quick timeline France, 12th century: courtiers de change, the first brokers Traders have always tried to be the fastest 1998: HFT is proposed by Bernie Madoff in front of the SEC 2010: 70% of trades in the US, 2% of traders
  • 8. The New-York Times: “Nearly everyone on Wall Street is wondering how{ hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.” “The fair evolution of competition on financial markets” by Goldman Sachs and others Greater liquidity
  • 9. Price discovery { Reduction in market volatilityEconomies of scale intrading (order latency)
  • 10.  Brings volume and liquidity to markets  Reduce risks  The advantage of  Reduce bid/ask spread microseconds over “Fill the gap” milliseconds/seconds  Enhancement of  Reducing commission competition pricesPros of HFT for short termpositions
  • 11. { Bombing the marketThe Disadvantages of HFT
  • 12.  Programmed algorithms beyond human control  Flash Crash  Unfair advantages through flash trading, computer technology  Lack of transparency – public doesn’t have fair access to information  Dark pools  Regulations and standards for high- frequency trading lackingThe disadvantages of HFT
  • 13.  A large single trade by a financial company triggered algorithms to buy and sell simultaneously, which sent stocks into a spiral beyond control.  Investigations by the U.S Securites and Exchange Commission concluded that at this time the market is too fragile and fragmented to handle such technology  There is the speculation that a crash could happen again in the future, but may not repair itselfFlash Crash – May 6, 2010
  • 14.  Flash Trading – component of high frequency trading  High-speed trades that give a group of high- frequency traders trading information a in advance before they are entered into the entire market to be filled  Provides unfair advantage to only a handful of investors with access to the technology, or ability to pay for itUnfair Advantages
  • 15.  Advantages given to flash traders creates a two- tiered market in which a certain class of traders can unfairly exploit others  Dark Pools – Large groups of stocks connected to other networks, which allow traders to move shares through flash trading without announcing the transactions on the open market  Provides ability to anonymously trade, making it difficult for the public to get accurate prices  Traders involved receive an advanced preview of the intentions of larger investors before the publicLack of Transparency
  • 16.  Hard to see who the high frequency traders are, what they are trading, and when they’re doing it  Regulators and Investors are losing faith in the trading system, unsure of accuracy  It is still questioned whether it’s the high- frequency trading that’s unstable, or the algorithmsRegulations andStandards for HFT lacking
  • 17. { The world as we knew itSummary,Recommendationsand Conclusion
  • 18. 1. HFT causes volatility when it trades 2. HFT causes volatility when it DOESN’T trade 3. HFT generates massive amounts of profit for financial institutions 4. Technology gives HFTs an unfair advantage over individual investors and institutional investors 5. HFTs who use direct feeds can “predict the future” a few milliseconds in advance, or “anticipate” investor ordersStatements made about HFT
  • 19. { Pro’s { Con’s  Unpredictable  Greater Liquidity Consequences of  Decreased Latency Algorithms / Too Risky, Ban It Periods  Lack of Regulation and  Price Discovery Transparency  Vacuuming up Pennies –  Reduction in Market Money, not Value Volatility  Flash Trading  Unfair Technological AdvantageHFT Summary
  • 20. { High-frequency traders are not Wall Street insiders; instead they provide a valuable service as the new market makers. High-frequency trading should not be banned.Recommendations AndConclusion
  • 21. Questions?