Planet Money: High-Frequency Trading In Spotlight
MELISSA BLOCK, Host:
The thousand-point, single-day market drop last month has put a relatively new breed of trading in the spotlight: high-frequency trading. It's based on algorithms that direct computers to scour the market for tiny opportunities - make one cent here, half a cent there. The computers do that millions of times an hour at such high speeds that in the end, it adds up to real money.
BLOCK: Should we be afraid?
CHANA JOFFE: When I say it like that it sounds kind of scary, right? Is it? I wanted to see this brave new trading world with my own eyes. I wanted to go to the spot where some of these trades are taking place. So I went not to Wall Street, but an hour and a half away to Mahwah, New Jersey - small town, population 24,000, where Mayor Richard Martel has been mayor for 14 years.
RICHARD MARTEL: So here we are.
JOFFE: Here we are. Oh, yeah.
MARTEL: In beautiful downtown Mahwah.
JOFFE: Is this downtown?
MARTEL: No. Mahwah doesn't really have a downtown.
JOFFE: What Mahwah does have is strip malls, lots of trees, rolling hills and a new building going up on MacArthur Boulevard. It's right in between a frozen foods facility and a company that makes artificial limbs. The New York Stock Exchange is building something, something huge, as big as a Wal-Mart; something high-frequency traders are paying a lot of attention to.
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JOFFE: So do you know about the New York Stock Exchange Building down the way here?
NANCY JACKSON: The one down on MacArthur Boulevard, on the side there? Well, I don't know exactly what it is, but I know it was a big deal. But...
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JACKSON: I think...
JOFFE: What do you know about it?
JACKSON: I just know it was big building that they built and that was it.
JOFFE: You know what goes on in there?
JACKSON: Not really. No, I don't. But if it's stocks and - stock exchange, it's got to have probably many, many documents.
JOFFE: Mayor Martel is one of the few humans that has seen the inside.
MARTEL: It's pretty nice and it's awfully full of electronics, wiring - I mean, these are wires that were six-inches around. They're like a huge cobra by the hundreds. It's almost indescribable.
JOFFE: So, say the computers see an opportunity to make half a cent in half a second. And all the firms have fast computers, everyone has similar algorithms. The computers that are physically closest to exchange will win. So the firms lease space inside this brick building, inside the New York Stock Exchange for their servers to sit just a few feet away. So, should all this scare us?
STEVE RUBINOW: 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.
JOFFE: This is Steve Rubinow with the New York Stock Exchange, and he says if you want to sell something, you want to buy something, those high-frequency computer are there to sell and buy from you.
RUBINOW: Which makes for a fairer market for all participants, both the people that are up to their necks in it, and people like you and me as retail customers. Those prices are about as fair as they can be.
JOFFE: No way, says Kevin Cronin. He works for Invesco. And Cronin is more like what you think of as a regular investor - manages big pension funds and mutual funds. And he says high-frequency computers watch what he does. When he starts to buy, the computers swoop in and start to buy as well, and then sell at a higher price minutes, sometimes even seconds later.
KEVIN CRONIN: They don't care about the stocks. All they care about is jumping in front of us and making a penny or two, and doing that millions of times a day.
JOFFE: That seems annoying to you. But why is that...
CRONIN: Of course it's annoying.
JOFFE: Oh, but why is that wrong?
CRONIN: What are they doing to provide anything in the marketplace other than trying to take the information that our orders give and try to profit themselves?
JOFFE: Now, high-frequency traders counter that anyone can pay to get access to that information and that speed.
BLOCK: Chana Joffe-Walt, NPR News.
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