What the Buzz is High-Frequency Trading?

High-frequency trading is something that lately has been making the rounds in the news. In general, the language of the stock market world is obscure, making most of us scratch our heads and go “huh?” but this one may be a little less so.

High-frequency trading refers to the use of computers to automate certain types of trading, cutting out the traditional human floor trader. High-frequency traders make use of a computer code or algorithm that analyzes trading information to identify stocks that can be bought and then sold for a higher price within a short period of time. The turnaround is often counted in seconds and minutes rather than days and weeks as it used to be, because the trading is done computer to computer.

It seems like a wacky thing to do, but it actually makes a lot of sense in transactions that require little more than crunching numbers. Computers can compute and do projections much faster than a human, so they can spot opportunities that may pass a human by. A good example would be stocks that have a price discrepancy between two markets; the computer buys from the lower-priced markets and then promptly sells it in the higher-priced market.

Many stock markets have modified their processes to accommodate high-frequency trading, and the players in this field are newcomers, mostly small and technology-driven in contrast to the traditional traders. This is a good way to level the playing field that has historically favored established companies. But because it has become so popular, the regulatory bodies have been busy in determining the impact and legality of high-speed trading. The jury is still out on that one.