In the world of high-frequency trading, speed ….doc

High Frequency Trading David Schmoeller, Ann Genova, Alta Sharkhuu High-frequency trading (HFT) can be defined simply as trading securities in the financial markets multiple times at high speed in a fraction of a second. Beyond this simple definition, little consensus exists on what this “quantitative event-driven trading” is and is not. It has been around since at least the late 1990s but attracted a great deal of public attention in 2009 when Goldman Sachs announced high earnings while the rest of the U.S. experienced economic hardship. Many people also blamed the volatility of the financial markets between 2008 and 2010 on HFT. In this paper, we look at the computer hardware and software behind this unique information system and why it is a controversial topic in the financial community. We argue that high-frequency trading certainly has the potential to provide a significant advantage in stock trading and contribute to market volatility but that the evidence of it actually doing so is inconclusive. This style of trading is considered distinct from trading on exchange floors and day trading online in several ways. First, it is a relatively bare-bones operation. Unlike other forms of trading, high-frequency firms tend to hold few securities at the close of trading each day and rarely use borrowed money. There are numerous stories about how these firms started in a small space with central processing units stacked, exposed cables running along the walls and floors, and multiple monitors tuned to different markets. The founders of Getco, for example, started with a small office crammed with hot computers in the Chicago Mercantile Exchange. These are the offices of computer scientists and mathematicians, not just financial traders. These traders use sophisticated computer programs, algorithms, and high-speed networks to buy or sell securities. The use of computers has hastened transactions into milliseconds, microseconds, and nanoseconds, which ordinary human trad