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Trading & Dealing in Security Markets - Essay Example

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Trading & Dealing in Security Markets

Investigations showed that the crash occurred due to a single mutual firm fund that sold a large number of contracts worth 4.1 billion USD and this triggered a reaction from HFT machines that quickly dumped their positions thus pulling the Dow index down. The HFT machines then quickly bought stock at the lower prices and this made the stocks rise then dumped the stock and this ‘hot potato’ trading continued until equilibrium was brought in. All this happened in a few minutes due to the fragile and interconnected nature of the market (SEC, 30 September 2010). There are fears that since algorithms used in the software decision making are hidden, it is difficult to asses if HFT amplifies or dampens the market equilibrium prices. HFT also encourages Flash Trading where certain traders can see incoming buy or sell orders for securities about 30 milliseconds before others do. This lead called 'front running' allows HFT traders to execute their trading strategy ahead of others (NYT, 8 October 2012). HFT traders also have the advantage that they can turn their machines off when the risks and trends are against them and thus they can cut their losses. Overall, trading is thus reduced to a war of technology and speed of connectivity and the financial software and hardware market was worth 25.4 billion USD in 2011. Terms such as scalping, shorting have become common and HFT run transactions in less than 10 milliseconds (Gsell, 2009). 2.2. Advantages of HFT HFT brings equality in the market and a small trader with a single terminal running powerful HFT software can overcome billion dollar traders. HFT is also credited with bringing liquidity in the market, reducing risk of frauds perpetrated by large...
The author of the essay "Trading and Dealing in Security Markets" begins with that High Frequency Trading – HFT makes use of powerful computers that automate the trading process and where trading software takes the decisions to buy, sell or hold stock. The practice is also called as Algorithmic trading, Algo trading, automated trading or black box trading. Since the commands are executed by software systems, positions on various stocks are held for durations that vary from a few seconds to a few minutes. HFT has been blamed for ‘flash’ price variations where the prices changes very rapidly for no apparent reason. With high profits almost assured and reduction of losses to a minimum, many traders have started using HFT. In a way, HFT represents the inevitable move to high technology. Like many other areas of business processes such as procurement, automatic ordering in supply change management, ERP systems, humans are removed from decision-making and power is vested in machines. At the end of the essay the author concludes that since HFT yields high profits, many more firms will take up this practice. HFT certainly has some ill effects on the stock movement and these needs to be constrained and regulated. The regulations must not place HFT under disadvantage and new technology must not be punished. The author also gives his recommendations. Thus, traders should not be allowed to switch off their machines when stocks are falling. This will ensure HFTs remain operational even when they stand to make a loss, just as any day trader. ...Show more


The author of this descriptive essay mainly focuses on the discussion of the topic of Trading & Dealing in Security Markets. The author starts with the short introduction of the topic and comes to the interesting conclusions at the end of the research paper…
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Trading & Dealing in Security Markets essay example
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