High Frequency Trading – Speed and Consequences

As explained in the above video, high frequency trading is the quick execution of buy and sell orders by a computer algorithm sent to a financial market. Keep your trading stable among the fast HFT world by watching more trading videos. Many of these high frequency orders are placed in bursts, hoping another algorithm will pick up and buy or sell based on the aggressiveness of another “robot.” This type of trading now accounts for around 70% of all orders processed in the major exchanges, such as the NYSE and CME. Computers with the most direct access have a distinct advantage over competing robots, as they know what price will be ahead of competitors. This created a race to build the fastest fiber optic line from Chicago to NYSE. The reason for this is the Chicago commodities markets influence the indices trading in the NYSE. The price of crude oil is related to the Exxon stock and vice-versa. One can easily understand why companies have spent millions trying to get the most direct route; whether blasting through a mountain or broadcasting through soon-to-be-built towers. In fact, professional trading firms have rented servers inside the exchanges themselves for the shortest physical distance possible. The NYSE has gone through the trouble to provide equal cable length to all servers inside its 20,000 square foot server room. This raises concern as trading has become a game of who can program the most profitable robot, disregarding the underlying economics. The flash crash of 2010 demonstrated a pitfall of high frequency trading – we still cannot account for the hundreds of billions lost (that have since rebounded) during the three minutes or so of the crash. Purportedly, one man’s algorithm (and sizable account) created a domino effect among the other algorithms, creating a vacuum that was only stopped by an emergency “breaker” flipped in the exchange. This mini-documentary has audio produced by Radiolab.

Buy and Sell Orders on the DOM


If you’ve ever spent considerable time day trading, you’ve likely pondered the purpose of the buy and sell orders that rapidly fluctuate in your charting software. In NinjaTrader, these values appear in the DOM window. In TradeStation, the DOM equivalent is the matrix. One cannot always rely on the buy sell values to determine support and resistance. Attempting to “tape read” these values will often result in failure. Why is this? May of these orders are “phantom” orders, placed by automated systems in hopes of manipulating retail traders to enter at compromising positions. If you look closely, you’ll see these orders disappear when price nears. What can do you about it? Don’t use order quantities to place your trades. This phantom phenomena occurs in the ES and across all other futures and currencies.

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