High-Speed Trading: Profit—and Danger—in Milliseconds
“The speed of light is fast,” Hunsader says, “But it’s not as fast as the high frequency traders would like it to be.”
The trick is, you have to have a super-fast computer and $100 million in deployable cash to make it work.
Hunsader says he sees these trades happening so frequently, in fact, that he advises individual investors not to make any trades at all between 9:58 and 10:02 a.m. Eastern, since many economic reports are released at exactly 10 a.m.
The high speed, high volume trading he’s seeing can cause asset prices to gap by small increments — so that if you’re executing a trade at that minute and a high speed trader is jamming data lines at the same time, you might not get the deal at the price you thought when you pressed the button to process the trade.
What’s more, Hunsader says, this kind of trading is causing market instability—to the extent that the right set of circumstances could set off a cascade much worse than the flash crash of 2010.
“You might hear, ‘we’re doing fine, now,’” Hunsader says. “Well, yes, everything will be just fine as long as, as the news is sunshine-y happy. If you get a shock to system, you’re going to see very quickly just how undercapacity we are.”
Not everybody sees high speed trading as dangerous, of course. CNBC spoke to Jim Overdahl, a vice president at NERA Economic Consulting, who argued that high frequency trades are an important tool for professional traders.
“I think the bottom line argument on the benefits of high-frequency trading: it’s a risk management tool for professional traders,” Oberdhal said. “It allows them to quickly revise their quotes and offer better quotes because they’re able to manage the risk of being picked off by better informed trader or traders with superior information about order flow or market moving news.”
—By CNBC’s Eamon Javers
Follow Eamon Javers on Twitter: @EamonJavers
CORRECTION: An earlier version of this article misspelled the last name of Jim Overdahl, a vice president at NERA Economic Consulting. And due to a transcription error, the precise wording of his comment was not correct. It should have read: “It allows them to quickly revise their quotes and offer better quotes because they’re able to manage the risk of being picked off by better informed trader or traders with superior information about order flow or market moving news.”