Saturday, April 9, 2011

A few on High Frequency Trading.

High Frequency Trading (HFT) is the practice of taking very short term positions to take advantage of small mispricings.  These mispricings are usually caused by inefficiencies in market structure rather than substantive deviations from fundamentals.  HFT makes up 70% of stock market volume.

1. A Nobel Prize winner thinks it should be banned outright (in the video he talks about some other policy stuff first).

2. It turns out that the limiting factor in HFT is the speed of light.   Apparently this limits the ability to pursue certain trades.   A map shows the optimal locations for trading centers.

3.To make things "fair" in the trading center next to the NYSE, the so-called "co-location facility", the NYSE is using the same cable length for all the different trading outfits.

4. Research on the whether HFT is beneficial suggests that HFT may improve price discovery - in other words it makes markets more efficient.