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The Risks Of High Frequency Trading In The Stock Market

 

 

The Risks Of High Frequency Trading In The Stock Market

If you have or are considering putting you hard earned money into the stock markets then the information detailed in this article is something you should know if you don't already, I think you will find it to be of great benefit. High frequency trading, also known as alogorithmic trading or robotic trading has completely changed the way the stock market works. Although has this made them better? The answer to that question is still under debate as numerous reports have yield different results but one thing for sure is it certainly has added a lot of volatility.

A lot of investors have had to reexamine their financial education in light of new strategies that have appeared in the stock market. New technology in computers and communications systems have resulted in aggressive programming of automated trading operations. Many of these automated trading systems use very aggressive tactics that tend to undermine the stability of the entire stock market.

Consulting a broker for the best financial advice is still a good idea and they will have the strategies that appear to be most effective. High frequency trading is the practice of using computers to make a huge numbers of transactions. These are carried out between different computers from different firms far faster than human traders can. They also involve amounts that are far greater or smaller than people are capable of processing.

Firms using the best super computers will be able to corner markets by consistently outbidding each other hundreds of times a second to make small profits on each trade. Traditional brokers rely on larger trades with greater margins to make a profit, but computers are not limited by limits of time or computing numbers. These computers often have complex algorithms making a variety of different types of trades, and changing how each one is made, dozens of times a second.

The benefit of this operation to the trading firms is that they might make a penny on each trade. However, with thousands of trades in a few minutes, they have potential to leverage a large amount of money into a reasonable profit. Firms using these strategies usually buy and sell thousands of stocks and options during a day, but cash out at the close of business. This is a direct contrast to normal investors who try to hold their shares of stock long enough to make the most profit from each share. The effects of high frequency trading are causing everyone to examine their financial literacy.

There is a lot of discussion among experts about the long-term effects of high frequency trading and the exotic algorithms they are using. They are certainly affecting the investment strategies of many traders. Some believe the firms are only using technology to their advantage and profiting from the available margin in stock prices. Others are worried about the unintended consequences of unregulated trading, especially when it can involve such an incredibly high number of trades, stocks, volume, and liquidity.

Algo trading obviously does not benefit the guy with out the sophisticated software which is more often than not the small guy. Big HFT firms are making on average almost twice as much as then the small investor and unfortunately those are the guys with their life savings tied up in the stock market with the hopes of getting a better return than the pitiful interest the banks will offer you for leaving your money with them.Consumer confidence is leaving the markets and for good reason.

There was a flash crash of the stock market on the sixth of May 2010. It was a direct result of an aggressive algorithm causing stock prices to spiral out of control. The stock market lost about a thousand points and gained them back in a matter of minutes. Until this is regulated better, it is very risky to invest in the stock market. Not to say that money can not be made in the stock market but you should only invest what you can afford to lose.

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