What is Ultrafast Trading
Ultrafast trading is a method of trading stocks by using computers and algorithms to execute trades within milliseconds of market changes.
BREAKING DOWN Ultrafast Trading
Ultrafast trading, also known as high-frequency trading, is a very competitive method of trading that occurs completely online. Although it is facilitated by brokerage firms, it is done without the human component that is traditionally used. These computer programs make lightening fast trades that can act quickly and repeatedly based on small discrepancies in prices, racking up a large profit before the market has time to correct.
While this form of trading can be very profitable since the margin of human error is smaller, it is not without its controversy. Ultrafast trading has been heavily criticized for increasing the severity of stock swings and contribution to the manipulation of stock prices. Advocates of the software say it does the opposite, and improves efficacy when it comes to trading
Lawsuits have been filed over the ownership of the technology behind the software. Investment firms have accused the individuals they hired to write the code of taking the code with them when they move onto another brokerage.
Ultrafast Trading in the News
In 2010, ultrafast trading came into the spotlight when Sergey Aleynikov, formerly of Goldman Sachs, was found guilty of stealing code for the bank’s ultrafast trading algorithms. It was said that the code was responsible for $300 million of the firm’s 2009 earnings, which was less than their total earnings of $45 billion, but still a large amount considering the low overhead used to execute these high frequency trades.
Ultimately, Aleynikov was convicted of stealing proprietary information from Goldman Sachs with the intention of taking it to the company he had recently been hired by, Teza Technologies. It was reported that Teza Technologies were going to pay Aleynikov triple what Goldman Sachs had to create algorithms for a hedge fund trading platform.
These days the codes are largely already written, and many of the bigger brokerage firms have the technology to compete in the ultrafast trading sector. This leaves a smaller section of the market to take advantage of. Since back when Goldman Sachs was fighting their lawsuit, profits have begun to decrease on these types of trades. In 2017, profits from companies executing high frequency trades fell below $1 billion. This marked the first time trades fell to that range since before the recession in the mid-2000’s. With more companies attempting to take advantage of these small market fluctuations, there are less of them available to profit from.