Technology is often described as a blessing or a curse. High-frequency trading, where traders use computer algorithms to quickly analyse market information and place orders milliseconds before other investors, may well be both.
Its practitioners have been accused of paying stock exchange operators to locate their computers nearby, maximising their head-start, and for access to their order books before they're made public. That lets them buy requested shares then sell them to the original bidder at an inflated price, a form of 'front-running', and to profit from the price moves caused by large institutions' orders. However, supporters say they act as a 'market-maker', increasing liquidity and lowering transaction costs.
There are clear benefits for traders - high-speed trading firm Virtu Financial claims it made money on all but one of its trading days over the past five years. However, recent negative press has caused it to delay its initial public offering. Author Michael Lewis's new book, 'Flash Boys', has whipped up the biggest wave of scrutiny since the 'flash crash' of 2010, when a lightning-speed sell-off caused US stocks to plummet within minutes.
Moreover, Chicago-based CME Group, which owns the world's largest futures market, is being sued for allegedly selling access to its order book to high-frequency traders. And EU legislators are voting this week on whether to implement mandatory tests of traders' algorithms, among other measures. Still, a proposal to enforce a minimum time period for share orders to remain on order books, which would severely hamper high-speed trading, was dropped last year.
