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High Frequency Algorithmic Trading Overviewed

Why Read: If you participate either directly, or have capital invested in the financial markets that is managed by others, you ought to have a basic understanding what high frequency algorithmic trading is, what it isn't, and generally how it works.

Commentary: High frequency algorithmic trading is trading done in milliseconds in a largely unregulated environment, where the objective of those who participate generally work to clear their positions at the end of each trading day. It is to a large degree about fractions of pennies or pennies generated on millions of trades and 'false trades' that in the end add up to millions and billions of dollars (or Euros, or yen, or whatever currencies the securities 'computer-traded' are denominated in.

High frequency algorithmic trading has nothing at all to do with company earnings, who is on the Board or who manages a company, technical analysis, or a company's prospects.

High frequency algorithmic trading does care about 'actionable patterns' discerned from the astronomic amount of data available to be read by computers, on arbitrage strategies, on game and crowd theories, and on physical proximity to the computers where trades are executed - the latter because computers operate so fast that even at the speed of light it takes light longer to travel from Los Angeles to New York that it does for it to travel from New Jersey to Manhattan.

High frequency trading is said by many not to affect investment markets, but rather that if anything it stabilizes them. That may or may not be true. It is also said by many that high frequency trading does not contribute to financial market volatility. That also may or may not be true. Intuitively, I am prepared to believe - at least for the time being, until more is known - that it may not affect long-term investment markets. However, I am not intuitively prepared to believe that it does not affect financial market volatility until I see more definitive prove of that.

I think the referenced article give a good broad overview of high frequency algorithmic trading, and recommend you take the time to read it.

Topical Reference: Will HFT Burn a Hole in Your Portfolio, from Financial Sense, Doug Hornig, July 26, 2012 - reading time 6 minutes.

 

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