High Frequency Traders Need A Speed Limit

High Frequency Trading is being done more and more by big banks and hedge funds. High Frequency Trading has been blamed for number of flash crashes in the past. Big banks and hedge funds are in a competition now a days to increase the speed with which their algorithms can execute trades. These algorithms can now execute trades in a millionths of a second. Does it serve any purpose?

In today’s electronic financial markets, a single investor can execute more than 10,000 trades a second, meaning that more than 1,000 trades can happen in the blink of an eye. Electronic trading firms are willing to spend hundreds of millions of dollars to shave off even millionths of a second. This raises an important question for human welfare: If real economic activity depends on people doing things, and people can’t possibly think or react this fast, who benefits from all the speed? Judging from new research, hardly anybody does. The markets may be running too fast for their own good.

High Frequency Traders are also known as Speed Traders. These Speed Traders have turned the modern financial markets into a big casino. There is so much volatility in the markets now a days that you don’t know what to do. The recent example is that of the CHF 41% appreciation that happened in just a matter of few minutes after the Swiss National Bank announced that it was unpegging CHF from EURO. USDCHF dropped 1,867 pips in just one minute so fast that even the big forex brokers like FXCM and Alpari UK had no time to close their positions. The result is billions of dollars lost by the investors who were on the wrong side of the market on that day. Most of these investors and traders had no time to close their positions. EURCHF fell 2,297 pips in just one minute wiping out the accounts of many traders who were long on EURCHF on that day. You can read the above article also that also argues on these same lines that too much speed serves no purpose. The article suggests a speed limit of 0.1 second for these High Frequency Traders. Watch this video below also that explains how High Frequency Trading works and how it caused flash crashes in the past!

You should also watch this video that explains how high frequency traders siphon money from the stock market at the expense of genuine investors!

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