Kevin Meyer

The New "Short Term": 30 Milliseconds

We often rail against the short-term perspective by traditional investors, especially when lean manufacturing transformations can take years.  Financial horizons measured even in quarters often drives poor decision making.  Now the definition of "short term" is once again being redefined by technology.

Try 30 milliseconds.

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices. It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets. Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed.

Yes, these systems actually allow a 30 millisecond "preview" at upcoming orders.  A lot can happen in that tiny fraction of a second.

Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds. High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading.

An example?

To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month.

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. 

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

All in less than a second.  $7,800 may not seem like much on that volume, but multiply it by thousands of stocks, and you'll realize that some decent bucks are being made.

Without any knowledge at all of what the company is about, the products it makes, and the markets it competes in.  Let alone long-term strategy.  Some "investment."

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