High speed trading has become an issue in the investment world over the last few years.
High frequency trading involves an investor (usually a firm) using computer based strategies to execute thousands of trades per second. Instead of chasing large returns on relatively few investments, high speed traders attempt to make small profits on an extremely large volume of transactions. It is estimated that approximately 75% of all U.S. equity transactions are the result of high speed trading.
While an interesting strategy for the traders, there are potential problems for other investors.
With the volume of trades conducted, there may be increased volatility in the traded company or asset. The rapid trading may significantly move prices both up and down. In one instance in 2010, the markets lost USD 1 trillion in 30 minutes. Part of the loss was likely due to high speed trading activity.
Given ever improving technology, it is conceivable that speeds can continue to increase and that more investors will be able to follow these strategies. That may mean even greater volatility in the future.
On the positive side, the increased trading volume should serve to narrow the spread between bid and ask prices on shares. That makes trading more cost efficient for investors as a whole.
Unless it is your chosen business, high speed trading is not something that I recommend for investors. It is extremely complex for most investors and can be a stressful endeavour.
I suggest focussing on the long-term using primarily a buy and hold strategy with solid, low-cost, well-diversified assets.
To read a little more on high frequency trading, please check out this Bloomberg article.
