Traders who take part in high frequency trading are using advanced technologies in their desire to be successful. They trade securities such as stocks or options using very sophisticated computerized algorithms. There is a frantic pace to high frequency trading. Positions are held for very brief periods of time, sometimes for no more than just a few seconds. These traders may literally make thousands of trades every day. Usually these traders are employed by large diversified firms. One of the biggest problems of this type of trading is the sensitivity it stocks ticker sentiment to the markets' processing speed.
On May 6, 2010, the Dow Jones Industrial Average dropped approximate 1,000 points. This event has become known as the "flash crash." Fortunately, within a few minutes, it had recovered this loss. The loss, however, was the single biggest loss in the history of the Dow Jones Industrial Average. The event was investigated for nearly five months. Eventually it was determined that this wild swing was, in all probability, caused by high frequency trading. Because of this, this type of computerized trading has been under very close scrutiny by the United States Securities and Exchange Commission.
One of the things that the SEC has been closely examining is co-location. This involves the location of dealers and file servers. The difference in time of as little as a millisecond can make a huge difference in these types of trades. Companies which utilize co-location are seen to have an unfair advantage, and this is something that the SEC is attempting to eliminate.
There is also a concern that this type of trading can have negative effects on investors all over the world. This is to be expected when one considers the fact that more than 65% of all stocks traded are done so with this trading method. Many regulatory agencies around the world are attempting to completely eliminate this type of trading. They see the use of extremely high-speed computers as the giving of an unfair advantage to certain traders.
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