Should You Care About High-Frequency Trading?

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The media, from Barron’s to The Daily Show, has been discussing high-frequency trading since the release of Michael Lewis’s Flash Boys and regulators recently initiated investigations into the practice. Regular investors are left wondering what the excitement is about and if it affects them. Below are six basic questions, answered, about high-frequency trading.

What is high frequency trading?

High frequency trading “HFT” is an investment strategy using advanced computer programs to rapidly buy and sell securities. Generally trading on fractions of pennies over the course of milliseconds, HFT started in 1999 after the Security and Exchange Commission “SEC” allowed electronic exchanges. The latency in the time it took for information to be transmitted to different markets was soon observed and firms began trading based on the data.

What is dark liquidity?

Dark liquidity and dark pools are both terms for alternative trading platforms, where a trade is made without general investor knowledge until completion. This method is advantageous to investors who want to trade large blocks of securities without affecting the publicly traded quote. Trading is through either a direct deal or a program that buys and sells without sending the order to the stock exchange. In his book, Lewis accuses banks of selling their clients’ information to HFT firms, who then analyze and trade on the data.

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