High frequency trading (HFT) has recently become big news in the investing world. HFT is defined by Investopedia as “a program trading platform that uses powerful computers to transact a large number of orders at very fast speeds.” On top of making large quantity orders quickly, HFTs survey different markets and use computer programs to decide what should be invested in and what should be sold. As with most things, the people who can act the fastest tend to get the best deals. HFTs’ have the ability to execute multiple transactions in a small amount of time. This allows people participating in the HFTs to be more profitable than their slower competition.
Although HFT trading is not new to the markets it has just recently re-entered the headlines because of the book “Flash Boys.” In his book “Flash Boys,” Michael Lewis talks about HFT in depth. According to an article from the Wall Street Journal, “He argues in the book that the markets are ‘rigged’ in favor of high-frequency traders and exchanges at the expense of investors.” Another reason that HFT trading has re-entered the headlines is because the time it takes to make the transactions. Transactions are now made in nanoseconds. This is because of the technology that has become available in recent years.
With HFTs in the news, it should be pointed out who they really are affecting. HFTs may actually be harming the short-term investors who use it to try to further themselves in the markets instead of helping them to get an edge on in the market. HFT also negatively affects the professional investors who have large stakes in the market. These groups are negatively affected because HFT can cause them to have to pay higher prices. On the other hand, long-term investors are not significantly affected because they do not depend on quick returns. They can allow their stocks to fall and rise over the course of the time they own them.
HFT has many different effects on the market, but as long as investors stick to long-term investing, then they should be much better off than their short-term-oriented counterparts.
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