High Frequency Traders
High-frequency trading (HFT) is a program trading platform which uses powerful computers to transact a great number of orders at very fast rates. It uses complex algorithms to analyze numerous markets and execute orders based on market requirements. Normally, the traders with the quickest execution rates are more profitable than dealers with slower execution speeds.
The Background
High-frequency trading became popular when trades began to offer incentives for organizations to add liquidity to the marketplace. As an example, the New York Stock Exchange (NYSE) has a set of liquidity suppliers known as Supplemental Liquidity Providers (SLPs) that tries to add liquidity and competition for existing estimates on the exchange. As an incentive to businesses, the NYSE pays a commission or rebate for supplying said liquidity. With millions of transactions each day, this leads to a sizable quantity of profits. The SLP was introduced after the collapse of Lehman Brothers in 2008, when calculating was a significant concern for investors.
Advantages of HFT
The significant advantage of HFT is it has enhanced market liquidity and eliminated bid-ask spreads that formerly would have been too modest. This was tested by adding prices on HFT, and because of this, bid-ask spreads improved. 1 study analyzed how Canadian bid-ask spreads changed when the government introduced charges on HFT, and it was discovered that bid-ask spreads increased by 9 percent.
Critiques of HFT
Decisions happen in milliseconds, and this may cause big market moves without reason. For instance, on May 6, 2010, the Dow Jones Industrial Average (DJIA) suffered its biggest intraday point drop ever, decreasing 1,000 points and falling 10 percent in only 20 minutes before climbing again. A government investigation blamed a enormous arrangement that triggered a sell-off for the crash.
Another review of HFT is it allows large organizations to gain at the expense of the “little guys,” or the retail and institutional investors.
Other Things To Consider
Among three primary market participants on the New York Stock Exchange (NYSE). Supplemental Liquidity Providers (SLPs) are market participants using sophisticated high-speed algorithms and computers to make high volume on exchanges so as to add liquidity to the markets. As an incentive for providing liquidity, the market pays the SLP a lien or commission, which was 0.15 cents as of 2009.
The Supplemental Liquidity Provider (SLP) program was released soon after the collapse of Lehman Brothers. The collapse of Lehman Brothers in 2008 caused significant concerns about liquidity in markets, which resulted in the introduction of the SLP to try to alleviate the crisis. Another two key market participants are Designated Market Makers (DMMs) and Trading Floor Brokers.
