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High Frequency Trading Essay

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HIGH FREQUENCY TRADING

Let me highlight a little-known topic outside the financial sector, to know, high frequency trading.
Firstly, what high frequency trading means ? It’s a program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. HFT uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds.
First, a short historical summary
HFT has taken place at least since 1999, after the U.S. SEC authorized electronic exchanges in 1998 (The intent was to open markets to anyone with a desktop computer and a fresh idea).
But as new marketplaces have emerged, At the turn of the 21st century , PCs have been unable to compete with Wall Street's computers. Powerful algorithms -- "algos," in industry parlance -- execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.   The New York Times in July 2009 was one of the first to bring the subject to the public's attention.
In the early 2000s, HFT still accounted for less than 10% of equity orders, but this proportion has changed a lot. According to data from the NYSE, high-frequency trading grew by about 164% between 2005 and 2009. Many high-frequency firms are market makers and provide liquidity (and it constitutes a major argument for HFT defenders) to the market which has lowered volatility and helped narrow Bid-offer spreads making trading and investing cheaper for other market participants.
In the United States, high-frequency trading firms represent 2% of the approximately 20,000 firms operating today, but account for 73% of all equity orders volume (that approaches the Pareto’s law we use to hear about a few wealthy owning most of the resources in the...

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