The Results of High Frequency Trading

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  • Topic: Dow Jones Industrial Average, Dark pools of liquidity, Finance
  • Pages : 3 (939 words )
  • Download(s) : 114
  • Published : May 15, 2013
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High Frequency? Or Insider Trading?

Dow Intraday Trading May 9th 2010

High frequency trading has reached a point in which its legality needs to be called in to question. These traders hurt markets and other investors while forcing large investors to move into dark pools. High frequency traders also have an unfair advantage when it comes to trading.

The above picture shows the most infamous trading crash caused by high frequency traders known to date. The Dow Jones Industrial average fell 600 points, and then continued to rise back up to its former levels fifteen minutes later. A drop like this is a clear sign of how unstable the markets can become when high frequency traders are in the mix of the markets.

Another scary incident caused by high frequency traders was the near collapse of Knight Capital, a major brokerage firm. In a matter of minutes a high frequency trading glitch caused the firm to lose approximately 400 million dollars. The collapse of a major firm like this would be awful for the markets; it would take away liquidity and stability. High frequency traders have caused flash crashes of both markets and firms on multiple occasions; they are clearly bad for the markets.

Many large investors have also been forced to invest in what are known as dark pools. Dark pools are barely regulated, adding to the temptation of insider trading and other illegal activities. The reason large investors are going to these dark pools is to be able to secretively make large orders that high frequency traders won’t be able to take advantage of. People used to be able to make large orders in normal markets, but now when trading, people need to chop up their orders in to smaller and smaller blocks to avoid being taken advantage of. This makes trading much harder on these investors and therefore trading is more difficult in the markets as a whole The real problem with insider trading is the unfair advantage that they have. “These super computers allow...
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