Marketplace Scratch Pad

Speed pays

Scott Jagow Aug 27, 2009

Let’s talk about this beast known as high-velocity trading. It’s also called high-frequency or flash trading. Critics have some other names for it — frontrunning, fleecing and wrong.

The concept is that millions of buy and sell orders are processed at lightning speed. Here’s our Whiteboard explanation.

In today’s Wall Street Journal, the two creators of the first “alternative trading system” defend flash trading:

Flash trading is like offering to sell your house to your neighbor before you officially put it into the real estate listings. For that matter, it’s just like what upstairs traders did in the pre-computer era: shopping an order before sending it to the exchange floor. We had no problem with this process, so why would we ban flash trading, which simply makes it more formal and produces an audit trail that the upstairs traders didn’t?

But the arrest last month of a former Goldman Sachs employee has to raise some questions. He was arrested for stealing proprietary high-speed computer codes that Goldman said might be used to manipulate the market.

A New York Post column asks the obvious question:

Is that what Goldman was doing with the program? Was it manipulating the market in unfair ways? Why else would it have had such abilities?…

Even Goldman customers, I’m told, are annoyed about so-called “high velocity trading,” in which Goldman’s computers allow the firm to jump in front of trades coming from inside its own system.

Enough!

Marketplace reporter Jill Barshay had a great story yesterday about how a lot of high-speed trading is happening near Wall Street. Why near?

If you’re in Greenwich, Conn., and you place an order to buy a stock, it could take a half-a-thousandth of a second for the order to reach an exchange. But if your computer is sitting in the same building with the exchanges’ matching engines, the computers that put buyers and sellers together, your order gets to the exchange 50 times faster.

And why is that important? Here’s more from the story:

VASANT DHAR: If you can have that edge, where you can get in your order a millisecond faster than someone else, then you’re there before someone else was.

BARSHAY: And being there first means making a fraction of a penny. Do that a few million times and you’re talking real money. High-frequency trading is all about volume. The more trades you execute, the more money you make.

DHAR: So it’s like a cash machine with very little risk. That’s what’s really appealing about it. You just make money every day.

People have been asking, what does this mean to me, the small investor? Maybe nothing. Then again… (New York Times)

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

Cross the Wall Street highway at your own risk.

Speed kills too, you know.

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