Is HFT the Coming Way to Invest?

High Frequency Trading has been around for the greater part of the 21st century. Basically, it’s the use of sophisticated technological tools and computer algorithms to rapidly trade securities. And when I say “rapidly,” I’m talking nanoseconds. Before you can blink your eyes, stocks will be bought and sold.

The algorithms and the high frequency traders were both found to have contributed to volatility in the Flash Crash of May 6, 2010, when high frequency liquidity providers rapidly withdrew from the market.

That’s the downside.

The upside is it makes the market more efficient and helps small investors who trade randomly. And while HFT can be an advantage to small investors, it takes advantage of large investors, who – instead of buying and selling hundreds of shares at a time – buy and sell millions of shares. That’s because high frequency traders try to profit from price movements caused by large trades. When a mutual fund sells a million shares of a stock, the price dips. When that happens, (again, before you can blink your eye) high frequency traders (or more correctly, their computers) buy when the price dips, hoping to sell a few minutes later at the normal price.

Do HFTs make a lot of money on one sale? Not necessarily. But they’re doing it constantly throughout the day. And each HFT is forever trying to be just a few nanoseconds faster, not because they’re competing with traders on the floor, but because they’re looking for an edge over competing HFTs to be the first to buy.

If you want to know more about HFTs, check out the video produced on them for “60 Minutes.” If you want to know how to invest with an HFT, call me at (843) 352-3262 or text me at (843) 474-6645.

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