When you conjure an image of the stock market, it's likely the tumultuous floor on Wall Street with traders holding a phone to either ear, scrambling and yelling. But computer algorithms make most trades today, within fractions of a second, and you could say the real NYSE action is in Mahwah, New Jersey, where its data center sits. Marketplace Tech is exploring investment technology as part of the Divided Decade project on the financial crisis of 2008. In the first of two installments, we hear from critics of HFT and its effect on the markets overall.
High-frequency trading relies on algorithms, and professor Jonathan Macey of the Yale School of Management labels some of them parasitic. He compares the strategy to a motorcycle rider noticing a truck driver on a highway, and then racing ahead to buy up all the gas along the route. When the truck driver gets to the next gas station, the rider knows the tanker must fill up and sells it to the driver at a premium. Like the motorcycle rider in this scenario, stock brokers have an incentive to do end-runs around investors to sell stocks to them at higher prices.