Sign in     Like us on Facebook Follow us on Twitter Watch us on YouTube

News and Blog

Join 5000 other sharemarket traders for regular blog updates!

Browse to a category

Blog Search

How to Make Money in Microseconds

Donald MacKenzie explores the world of high frequency trading in the London Review of Books

What goes on in stock markets appears quite different when viewed on different timescales. Look at a whole day’s trading, and market participants can usually tell you a plausible story about how the arrival of news has changed traders’ perceptions of the prospects for a company or the entire economy and pushed share prices up or down. Look at trading activity on a scale of milliseconds, however, and things seem quite different.

When two American financial economists, Joel Hasbrouck and Gideon Saar, did this a couple of years ago, they found strange periodicities and spasms. The most striking periodicity involves large peaks of activity separated by almost exactly 1000 milliseconds: they occur 10-30 milliseconds after the ‘tick’ of each second. The spasms, in contrast, seem to be governed not directly by clock time but by an event: the execution of a buy or sell order, the cancellation of an order, or the arrival of a new order. Average activity levels in the first millisecond after such an event are around 300 times higher than normal. There are lengthy periods – lengthy, that’s to say, on a scale measured in milliseconds – in which little or nothing happens, punctuated by spasms of thousands of orders for a corporation’s shares and cancellations of orders. These spasms seem to begin abruptly, last a minute or two, then end just as abruptly.

Little of this has to do directly with human action. None of us can react to an event in a millisecond: the fastest we can achieve is around 140 milliseconds, and that’s only for the simplest stimulus, a sudden sound. The periodicities and spasms found by Hasbrouck and Saar are the traces of an epochal shift. As recently as 20 years ago, the heart of most financial markets was a trading floor on which human beings did deals with each other face to face. The ‘open outcry’ trading pits at the Chicago Mercantile Exchange, for example, were often a mêlée of hundreds of sweating, shouting, gesticulating bodies. Now, the heart of many markets (at least in standard products such as shares) is an air-conditioned warehouse full of computers supervised by only a handful of maintenance staff.

Continued…

email

Comments

  1. Bill Davidson says:

    Hi Chris,

    What are the benefits for small private traders in the info from this article? Is there any way they can use this to their advantage?

    Cheers

    Bill

    • Hi Bill

      Essentially there is no easy way to profit from this information because the world of HFT is barred to small traders. There are substantial barriers to entry that cannot be overcome by small traders.

Speak Your Mind

*

General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.

email