High Frequency Algorithmic Trading And How It Affects You
Two years ago, I made the acquaintance of a high-frequency algorithmic trader, and was invited to view his operations: In a small, darkened room a few doors away from our office in Princeton, NJ, three traders sat hunched over large multiple-screen computers. Colorful charts writhed across the screens like snakes, and numbers flashed and scrolled, updating in milliseconds. Just recently, such secretive operations were brought into the limelight with the arrest of the Goldman Sachs engineer who stole the codes for an algorithmic strategy. The public is now aware that at least 50 % of the trades on Exchanges across the world are algorithmically driven. That is, no humans are involved as trades are executed at the speed of 500-1000 trades per second. And large blocks of shares are broken up, bought or sold in split seconds to avoid detection. The machines send out probes and gather information to enable them to profit from statistical arbitrage i.e. differences in Bid and Ask of as small...