The stock market took a roller coaster ride last week, moving alternatively up and down by greater than 4% by the end of every day of trading.
As reported by Travis Flenniken of the Times Free Press, many cite the emergence of high-frequency traders as the primary reason equity markets have become more volatile in recent years. HFTs use computer models, referred to as algorithms, to identify and exploit price discrepancies and market momentum.
Flenniken says these high-frequency traders have no interest in the fundamentals of the underlying companies, but rather these mathematicians use their computer models to sift through massive amounts of data to uncover the smallest of price discrepancies and profit from it.
According to research from the Tabb Group, HFTs account for as much as 53 percent of daily equity volume, up from 26 percent in 2006. For August, however, HFTs are estimated to have made up 75 percent of all U.S. equity trades, according to Wedbush Securities, the largest broker on the Nasdaq stock market.