Since our last post we have learned of some more incredible things being done by the major stock firms in Wall Street.
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Need For Speed And The Flash Crash of 2010
|click to enlarge via NYT|
...PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.
High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.
High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.
The best explanation we could find on youtube on what high frequency trading is was done by an 8th grader named William Arnuk for an 8th grade civics project! It is well produced and very clear. We post it here for your betterment. If you cannot see the embedded video here is the link: http://youtu.be/9ddoha-34gg.
For more information on high frequency trading we have provided a playlist of more videos from various sources. If you cannot see the embedded video here is the link: http://tinyurl.com/62aymz5.
Flash Trading And Mini Flash Crashes
Flash trading and high frequency trading are not the same thing. Flash trading is one part of high frequency trading. Here is a detailed but concise explanation of what flash trading is. In flash trading the computers are between a sellers request to sell shares of a stock and the general population of potential buyers. This gives the owner of those computers a first shot at buying the stocks before anyone else sees it. These flash trades not only make the buyer pay the highest price possible, but also can shape and manipulate the market.
An M16 assault rifle can fire a bullet 100m in just over one tenth of a second. In that same amount of time, the London Stock Exchange can now execute 800 trades."
|Progress Energy via NYT|
Here we include two videos to explain this procedure. If you cannot see the embedded video here is the link: http://tinyurl.com/4mzurbg.
"The greatest danger is the age-old sin of idolatry. Financial markets are alive but a model, however beautiful, is an artifice. No matter how hard you try, you will not be able to breathe life into it. To confuse the model with the world is to embrace a future disaster driven by the belief that humans obey mathematical rules."
Paul Wilmott, Financial Modelers' Manifesto
In Part 2 of this series we will speak about the latest techniques of investigating videos, twitter, blogs and the internet to determine where the market will head and to buy and sell based on this information - being read not by people but by computers.