Thursday, August 27, 2009

high speed trading goes off the street

Marketplace | Kai Ryssdal: It usually takes a while for Congress to catch on to exactly what Wall Street's doing. A couple of months ago the big story was high-frequency trading. How super speedy computers and complicated software could be skewing the market in favor of just a handful of firms.

Well, this week the Senate asked the SEC to take a look at the practice. One estimate by the research firm Tabb Group says almost three-quarters of all Wall Street trades are done by high-speed computers. Jill Barshay explains the action doesn't really happen on Wall Street at all.

JILL BARSHAY: When Vasant Dhar was running a hedge fund, he worked out what a lot of big banks and top flight money managers are realizing these days: You don't have to take big risks to make a lot of money. Instead, you just need speed.

VASANT Dhar: If you can have that edge, where you can get in your order a millisecond faster than someone else, then you're there before someone else was.

And being there first means making a fraction of a penny. Do that a few million times and you're talking real money. High-frequency trading is all about volume. The more trades you execute, the more money you make.

Dhar: So it's like a cash machine with very little risk. That's what's really appealing about it. You just make money every day.

The high-frequency trader's building blocks are a lightning-fast computer and software that can buy shares by the bushel in the blink of an eye. There's one more key component: location.

If you're in Greenwich, Conn., and you place an order to buy a stock, it could take a half-a-thousandth of a second for the order to reach an exchange. But if your computer is sitting in the same building with the exchanges' matching engines, the computers that put buyers and sellers together, your order gets to the exchange 50 times faster.