Speed trading: Stock market on steroids

August 12, 2011 7:44:55 PM PDT
The sudden ups and downs in the market this past week were accelerated by a new generation of software -- high-speed, high-volume computer trading that turbo-charges the process.

It wasn't that many years ago that stock transactions were done by people, using hand gestures, standing in trading pits. Then computers took over.

The latest development is software that monitors trading data and company news and can execute trades in microseconds. It's called speed trading or high-frequency trading, and in a sense, it has put the stock market on steroids.

"The volume has actually doubled from where it was a week ago before this volatility hit the market," said Guy Gentile, founder and chairman of Speed Trader, a company that provides the technology to individual investors. "I would guess that 70 percent of that is from high-frequency trading."

It is believed that sharp drops and spikes can be caused, not just by emotion and panic, but also by the faster speed of trading. Computer experts say it takes three microseconds to execute a speed trade and one microsecond to receive data about a company's stock. To put that in perspective, the blink of an eye takes 350,000 microseconds. A camera flash takes 1,000 microseconds.

The increase in speed comes from two things. Trading firms are locating their servers right at the exchange, they're literally plugging right into the source. Also, there is software that uses algorithms that help to detect trading trends along the lines of how Google can predict your search as you're typing it in..

The software is monitoring whether others are buying or selling.

"If they're seeing bids fading away -- people cancelling their orders out of the market -- then they will also back away as well," said Gentile. "If they see strength, they will jump on board."

Big trading firms and hedge funds are the primary users of speed trading. Investment advisers, such as David Lucas at Raymond James in San Jose, see why it's spreading.

"I think it's an opportunity for people to exploit the way things are," said Lucas. "Volatility makes it easy to make money trading both ways if you're equipped and prepared to do that."

However, individual investors may not have the risk tolerance.

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