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The Tuesday Podcast: The Million-Dollar Microsecond

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The Tuesday Podcast: The Million-Dollar Microsecond

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The Tuesday Podcast: The Million-Dollar Microsecond

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The Tuesday Podcast: The Million-Dollar Microsecond

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On today's Planet Money:

In high-frequency trading, people program computers to buy and sell stocks in quick succession under certain, pre-defined circumstances. The idea is to profit from fleeting changes in the price of a stock.

High-frequency traders include big banks and tiny little companies. And they're all trying to be even faster than each other.

A few years back, all the high-frequency traders were trying to get a one-millisecond edge over everybody else. Today, they're angling for a one-microsecond edge.

Shaving one microsecond off their time can win a company an extra $1 million per day, according to one expert we talked to. (The extra microsecond allows them to rush in and place their buy or sell order before everybody else drives the price up or down.)

Pension funds and other big, institutional investors complain that high-frequency traders profit by getting information about what buyers and sellers are about to do.

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"All they care about is jumping in front of us, and making a penny or two," says Kevin Cronin of the investment management company Invesco.

But NYSE Euronext, the company that owns the New York Stock Exchange, says we shouldn't be worried about all these companies and their superfast computers.

Steve Rubinow, the company's chief information officer, says this:

Every innovation of this type makes the market more efficient. ... The faster we trade, and the more people you have trading, any aberrations that exist in the market are taken out of the market really really quickly, which makes for a fairer market for all participants ... Those prices are about as fair as they could be.

NYSE Euronext just built this huge new data center out in Mahwah, New Jersey. The stock exchange's trades will flow through the computers there.

High-frequency traders can pay to rent space in the data center. That's important because the tiny delay involved in waiting for information to travel electronically from the stock exchange can actually make a difference in the microsecond economy.

For more on high-frequency trading:Read about the SEC's proposed ban on flash trading, a form of high-frequency trading that's come under a lot of scrutiny in the past year. For a discussion of "Algos Gone Wild," a paper on computer-driven trading, see the current issue of The Atlantic.

Subscribe to the podcast. Music (sound art?): Ken Nordine's "Fibonacci Numbers." Find us: Twitter/ Facebook/ Flickr.

Update: Thanks to the commenter who raised a few RSS-related issues and who pointed that I misspelled "Mahwah." The spelling is fixed, and we're working on the RSS stuff.