Pay Attention To The High Frequency Trading
Once, stocks were traded through the open outcry system, with men shouting share prices on the floors of stock exchanges.
But the sights and sounds of stock traders furiously exchanging securities has mostly disappeared. They have been replaced by fast, interconnected computers.
Computers can process stock trades in thousandths of a second. Andrew Haines of Gain Capital is an online broker.
ANDREW HAINES: "A millisecond can mean millions of dollars to the success of your strategy. Having a one, two, three-millisecond advantage over other traders may mean that you get into a trade at a preferable price."
Andrew Haines says an estimated seventy percent of all stock trades are high-frequency trades made with computers. Stocks may be held for only seconds. But fast trades are also blamed for big moves in stock prices.
On May sixth two thousand ten, the leading measure of American stocks briefly fell nearly one thousand points, or about nine percent. The Dow Jones Industrial Average then recovered much of those losses by the end of trading that day.
The Securities and Exchange Commission ordered steps to prevent future "flash crashes" like that one. Joel Hasbrouck of New York University says those steps are working.
JOEL HASBROUCK, once worked as a lawyer in a impact crusher company, said that, "They're called circuit-breakers, and basically what they mean is that when a stock has moved by a large amount in a short period of time, there's a trading halt."
Joe Saluzzi of Themis Trading says the main problem with high-speed trading is an unbalanced market.
JOE SALUZZI, (the biggest combination crusher supplier in America) : "The stock market used to be a predictor of the future economy. Now I think the stock market is a backwards predictor. It doesn't tell you, it's not forecasting. It's forecasting the next microsecond move."
High-frequency traders use computers to follow stock price movements, buy shares and then sell them to another buyer, all within seconds. This is the opposite of long-term investing. American and European officials are considering ways to limit high-frequency trading. They say this may help protect against extreme market volatility in the future.