YOUR MIND ON MONEY: High frequency trading has run rampant

By F. Marc Ruiz Times Business Columnist

We recently hosted and interviewed Sal Arnuk on the radio version of this column. Arnuk is the author of the book “Broken Markets,” which I highly recommend to those interested in investing topics.

“Broken Markets” provides an excellent history of what Arnuk calls the “plumbing” behind stock trading, but the book’s primary focus is in explaining and criticizing an investment strategy called high frequency trading, or HFT.

All stock market investors need to be aware of HFT and how it is impacting investors of all types in this day and age.

HFT is stock trading technique used by large investment firms and run by computers based upon mathematical formulas called algorithms. While there are many types of HFT strategies they all kind of break down into a high speed form of arbitrage in which computers attempt to exploit price inconsistencies between trading firms and exchanges.

As the name implies, HFT order decisions are executed extremely quickly, sometimes in milliseconds, and most HFT positions are held for only a few seconds. HFT decisions are based purely on mathematical calculations and give no consideration to the underlying fundamentals of the companies whose stock is being traded.

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