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October 23, 2012

High-frequency trading nears day of reckoning — tame or tolerate?

High Frequency Trading (HFT), or buying and selling stocks at microsecond speed with the use of sophisticated algorithms for proprietary purposes, may ignite the next financial bomb if regulators fail to rein its excesses and the fears of its critics are realized. But the practice continues to grow and dominate U.S. trading, and defenders say it has become an essential component of the market.

With the rise of high-frequency trading, “He who has the fastest computer wins the most money,” said Dennis Kelleher, president of the nonprofit financial-reform advocate Better Markets. “We have a collective action problem. Profit driven firms will not be thinking about finding the solutions required to protect investors and the markets. It falls upon the regulatory agencies to do that.”

Proprietary trading shops and hedge funds that try to capitalize on statistical arbitrage opportunities among different securities and asset classes within extremely short time frames, through hundreds of millions of trading orders per day, are the major players involved in HFT.”

Read Bora Yagiz’s full blog post here

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