High Frequency Trading: The Wolf of Web Street
// Posted by SarahP on 06/04/2015 (1:42 AM)
The idea of information traveling past the speed of light, while still proven impossible, is a tantalizing idea of increasing the speed in which the digital world can move even faster. For example, making stock transactions instantly, buying an item online in nanoseconds, and further revolutionizing technology.
Immediately moving information means that a tweet can replace a newspaper article or waiting for the pictures at eleven. The shocking events of the Arab Spring demonstrated the newfound power of social media, which can mobilize people together in order to demonstrate against long-oppressive governments. Where the Eastern European protesters in 1989 had handbills demanding change from their governments, Middle Eastern demonstrators in 2012 had smartphones and Facebook.
Brokers and computer experts are using the newest computer technology in order to play the stock market with greater speed. With the ability to make trades at nearly the speed of light, investors often make split-second decisions whether to buy or sell shares, often assisted by specialized computer programs.
Improvements in fiber optics, as well as the increase of communications speed, has allowed for companies to compete against each other in selling bandwidth to Wall Street clientele. Firms charge over $200,000 for a space in faster bandwidths, knowing that quicker communication between their boardrooms and the stock exchanges means the absolute fastest transmission of information about a company and its stock.
Wired already warns that the risks of light-speed stock trading are great, as one miscalculation could crash an entire company into bankruptcy. Computers make blink-of-an-eye calculations on stock predictions, and drive speculation for prices up or down.
I found it amusing that the workers laying the transatlantic cable feared the possibility of sharks eating the sensitive cables. While sharks are often considered predators to marine life, I had not considered them as threats to international stock trading. This jokingly reminded me of the TV series “Shark Tank,” in which three high-dollar investors are referred to as “sharks” for their corporate know-how. These metaphoric sharks are helping global commerce, as opposed to North Atlantic ones who could hinder it by simply eating a piece of fiber optic line.
Trading via computers has already proven risky before the advent of high frequency trading. During the Internet bubble of the late 1990s, companies loaded up stock data onto servers, and yet were often bankrupt shortly thereafter. Companies such as Value America, Pets.com, and Webvan disappeared into Internet oblivion as fast as they arrived.
High Frequency Trading is definitely improving the speed at which company information reaches trading floors and shareholders. However, the small digital lag of eight milliseconds per mile on a fiber optic line, plus the aforementioned risk of Atlantic sharks, is leaving the potential for massive chaos on Wall Street. The rapid speeds themselves can be a challenge to investors, as the price of a stock can drop dramatically in the milliseconds between the purchase of a share and its digital receipt for the broker.
Stock trading has rapidly evolved from the days of controversial tycoons such as Michael Milken or Jordan Belfort. Trading now occurs faster than the blink of an eye, and shares travel between brokers and investors in fractions of seconds. While some corporate sharks (unlike the ones threatening the transatlantic cables) enjoy eating up large quantities of stock, all investors using the new fiber optic technology must make extremely careful decisions, as the speculation can go from riches to doom in seconds.