Trading & Dealing in Security Markets

Trading & Dealing in Security Markets Essay example
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Finance & Accounting
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Trading and Dealing in Security Markets October 14, 2012 1. Introduction 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…

Introduction

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. However, the process must be regulated and flash price increases must be controlled (Ye, 2011). This paper examines the pros and cons of HFT and makes recommendations on how regulators can address the concerns that market practitioners have over HFT. 2. Literature Review HFT was allowed from 1999 when electronic exchanges were authorised. In those days, the trading execution time was of many seconds while in 2011, the time is reduced to microseconds. In USA, 70% of all stock trade in 2007 was due to HFT while UK had 60% of HFT. Other markets such as China, Japan and other markets have a proportion of 80%. Conservative estimates are that in 2007, HFT strategies used by 300 traders made profits of 21 billion USD (Keehner, 2007). HFT is used for trading in futures options, hedge funds, equity and volatile scrip’s from sectors such as IT, biotechnology, currency and other stocks that see quick variations. ...
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