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What is high-frequency trading? - YouTube
Channel: Stuff They Don't Want You To Know - HowStuffWorks
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what is high-frequency trading
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leave them on or take them when do we do
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that I was still we the thing okay now
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look serious you can turn back now or
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learn the stuff they don't want you to
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know welcome back to the show thank you
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for tuning in as always got Matt behind
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the camera I'm Ben agent scully remember
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her is somewhere off in the darkness
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which makes this stuff they don't want
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you to know now we've all heard this
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statement that time is money but in some
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cases that is literally true in markets
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around the world timing is everything
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and the smallest fraction of a second
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can equal millions gained or millions
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lost now last week Matt and I looked at
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an immensely important question
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could someone orchestrate a stock market
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boom or a stock market bust and in the
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comments you guys overwhelmingly said
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yes of course but there was one thing we
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left out of that series last week and
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this week we're partnering with all-time
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conspiracies to take a closer look at it
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could robots run the stock market I know
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it sounds like science fiction right
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like what are you guys smoking but it's
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not as speculative as you might think
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especially when we consider the rise of
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what's called high-frequency trading
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here's how it works I'm gonna paraphrase
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an article from the New York Times did a
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great job of explaining this
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high-frequency trading
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depends on algorithms or for those in
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the industry
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they're called algos and what they do
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are execute millions of trades per
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second and then they simultaneously look
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at dozens of public and private markets
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so what does this mean
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great question this means that the
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algorithms can spot trends much more
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efficiently and accurately and more
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quickly than a human investor so they
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can execute trades buy and sell within
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milliseconds so close that it might seem
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unless you're looking very closely to be
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a simultaneous event this weird kind of
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math
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radical magic occurs because these
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high-frequency traders minimize latency
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latency is just a fancy word for a delay
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there's a delay in the time between when
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investor a buys a stock and when that
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trade is actually executed and then
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again within this chasm
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you know that's maybe not even a full
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second millions of traits can occur this
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means that if you are a regular old
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school unfortunately biological day
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trader or something you are on the
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losing end of what's called information
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asymmetry so the times had this great
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report a while back about how these
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high-frequency traders can actually peek
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at a stock about 0.3 seconds before your
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average investor so about 0.3 seconds
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again before a trade is executed they
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can swoop in and buy this thing
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milliseconds beforehand and that changes
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the value so for a rough analogy if
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you've ever been trying to buy something
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online and you are bidding for tickets
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or you're on eBay or something and you
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enter a price but then the next thing
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you know the price that you had agreed
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to pay is totally irrelevant and the
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price of the thing has changed that's
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what's happening and that's not all
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that's happening you see during this
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process these traders in these
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algorithms can Pina stock and what they
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do when they Pina stock is that they
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sort of send out a fake bid that they
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can also cancel to get a read on how
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much people are willing to pay for this
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in the world of high-frequency trading
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this is called a flash bid now you might
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be asking yourself guys why is this a
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big deal online shenanigans like this
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occur all the time that's true and
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you're right but this is although it's
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not technically illegal yet this is
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another example of something that we
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have seen cropping up all the time in
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modern history and that is that as a
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species human technological ability is
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outpacing our legislative capacity there
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are things that we don't know how to
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legislate yet and if you just do a
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cursory search on high-frequency trading
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you'll find so many people arguing about
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what if anything we should do to
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change this to reduce this inequality of
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timing and information access to reduce
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this information asymmetry and of course
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you'll find people saying no we
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shouldn't the market will somehow
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correct itself but regardless of what
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you think about this specifically there
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is one thing that is crystal clear and
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it is this the role of human beings in
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the stock market in securities in
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commodities it has profoundly changed
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and likely will never be the same again
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what do you think will happen next is it
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possible that humans will be driven out
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of market mechanics entirely that will
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lose some kind of John Henry esque war
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and that the people who work on the
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stock market in the future will be just
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mathematicians computer programmers are
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the mechanics who clean and maintain the
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cold steel bodies of Wall Street's next
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generation of overlords I mean that's a
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little dramatic but is it wrong thanks
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so much for watching tune in for our
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brand new episode coming out later this
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week on the idea of robots ruling the
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stock market we'd like to give a big
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shout out to our friends at all-time
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conspiracies and we'd also like to hear
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from you so let us know what you think
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about the future of humans and the
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future of robots in the stock market is
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this good for the world's economy is
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this bad is this like a Skynet situation
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that's coalescing and if you don't want
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to find us on Facebook or Twitter that's
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fine we get it you can always send us an
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email directly we are conspiracy at
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howstuffworks.com
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at least met you and I are still
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conspiracy at howstuffworks.com until
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some sort of algorithm replaces us you
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know like some sort of hologram you know
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the thing they say about the Holograms
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on video is they're so good now that the
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only way you can really tell whether or
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not they're real is by looking at their
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eyes
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you
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