What is High Frequency Trading ?

High frequency traders took part of the blame for Wall Street's flash crash on May 6, 2010. Just what is high frequency trading. Nightly Business Report explains.


SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: From the second floor of this nondescript building in Red Bank, New Jersey, the high frequency trading firm Tradeworx buys and sells huge volumes of stocks in the blink of an eye. Tradeworx uses computers programmed to detect small price movements which can be exploited by nimble trading. Founder Manoj Narang says the strategy can be traced directly to decimalization, a rule change in 2000 requiring quotes in dollars and cents instead of fractions. That cut profits for market makers from several cents to a fraction of a penny per share. The only way to make money was to increase volume.

How Computers Have Transformed the Stock Market

Floor traders vs. the rise of computers

"This is an example of potential operational risk. Again how can one trade, or a series of trades, influence a global market?" says Williams, author of the just-published book, "Uncontrolled Risk: The Lessons of Lehman Brothers and How Systemic Risk Can Still Bring Down the World Financial System." "This speaks to weakness in this overall system," he says.