Manchester City Swing Traders: Mining Gains In The Forex Market

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Manchester City Swing Traders: Mining Gains In The Forex Market – Inside the Machine: A Journey into the World of High-Frequency Trading An editor’s journey into the world of high-speed trading and proprietary algorithms that make or break markets.

Two years ago this weekend, the infamous Flash Crash occurred, when the Dow Jones Industrial Average fell nearly 600 points in a matter of minutes, then rebounded even faster. At the time, institutional investor editor Michael Peltz was knee-deep in high-frequency trading—a 6,500-word feature called “Inside the Machine” that won the Society of American Editors and Writers. Excellence in Business Award for Excellence in Commentary Journalism and the prestigious Stephen Barr Award from the Society of American Business Editors.

Manchester City Swing Traders: Mining Gains In The Forex Market

Manchester City Swing Traders: Mining Gains In The Forex Market

2:45 PM ON THURSDAY, MAY 6, George (Gus) Souter got a call from one of his traders to come to the Bloomberg terminal. The Dow Jones Industrial Average fell 3.9 percent on the day on fears over Greece. In just five minutes, the index fell by 573 points. Less than two minutes later, the Dow was up 543 points, down 3.2 percent for the day.

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“It was just crazy,” Sauter, CEO of the Vanguard Group mutual fund, said a few days later. “I had to go to a fixed-income building, which was a five-minute walk from my office. By the time I got there, the market was packed.’

Clever, really. The aptly named “flash crash” temporarily wiped out more than half a trillion dollars in capital value, shaking the confidence of jittery investors in American markets. Dow component Procter & Gamble Co. shares, the ultimate defensive blue-chip stock, fell by more than a third in minutes before quickly recovering for no apparent reason. Several other major US companies, including accounting firm Accenture, saw their shares trade as low as a penny a share, only to close not far from where they started the day (about $42 a share in Accenture’s case) — again, nothing new. When the dust settled, 19.3 billion shares had changed hands, more than double the US stock market’s average daily volume this year and the second-largest trading day in history.

But the most amazing fact about the disaster to me is that no one understood what caused it. Based on the conversation I had with Securities and Exchange Commission Chairman Mary Shapiro two days ago, it shouldn’t be surprising. Shapiro, whose organization is responsible for maintaining “fair and orderly” markets, explained to me how after the October 1987 crash, the SEC conducted a detailed investigation to reconstruct what had happened. “Given the sheer volume of trading today, we’ve lost some of our ability to do that,” Shapiro said. “But we need to be able to do that to understand where the vulnerabilities are in the market and what practices exist that could hurt investors and the market in the long term.”

In 1987, the SEC’s task was much easier because the vast majority of listed US stocks were traded in one place – the floor of the New York Stock Exchange, where professionals working for Big Board member firms created a market based on the open market. protest auction system. Today, as a result of a series of regulatory changes aimed at increasing competition and making the market fairer for mom-and-pop investors, only about a quarter of all U.S. stock trading is now done through the publicly traded NYSE Euronext. Most of these trades are made electronically, either through new NYSE floor professionals called designated market makers or on the fully automated NYSE Arca platform. The remainder of US equity trading is spread across a wide range of venues, including the three other major exchanges (Nasdaq Stock Market, BATS Exchange and Direct Edge) and dozens of broker-dealer-operated trading systems, electronic communications networks (ECNs). ) and dark pools where buyers and sellers are matched anonymously (see also The 25 Best Stocks in High Frequency Trading).

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The last decade of fragmentation and automation has created an entirely new type of professional trading firm: one that uses sophisticated computer algorithms, often running on servers located next to the exchanges’ own machines, and feeds high-speed market data to buy and sell. immediate sale of securities. Some of these high-frequency traders place hundreds of millions or even billions of buy and sell orders per day, stop and roll them regularly, and may be on the other side of your trade. You don’t know who they are—privately traded firms aren’t required to reveal their identities—or recognize their names. A large bracket of high-frequency trading is Allston Trading, DRW Holdings, Global Electronic Trading Co. (Getco), includes firms such as Hudson River Trading, Quantlab Financial, RGM Advisors, Sun Trading, Tower Research Capital and Tradebot Systems.

High-frequency trading has become a multibillion-dollar business, accounting for about 50 to 70 percent of the total volume of the U.S. stock market on any given day. Since last summer, it has also been a lightning rod for populist anger aimed at Wall Street, although many of the biggest high-frequency firms operate far from the canyons of lower Manhattan in places like Chicago, Kansas City and Austin, Texas. . Critics accuse high-frequency traders of being fair-weather market makers who, unlike the former NYSE professionals they largely replaced, have no legal obligation to trade during periods of stress. They also argue that the rise of high-frequency trading has created a two-tiered market for technology that is unfair to long-term investors and creates potential systemic risks.

I became interested in high-frequency trading last year when I wrote an article for hedge fund firm Citadel Investment Group (more on that later). As an editor, it wasn’t until January that I realized what an amazing and mysterious world it is. My first stop was a company called Pragma Securities, an agency-only brokerage firm that combines over 40 different dark pools, electronic trading venues, and open market routes into a single source of liquidity for clients. Douglas Rivelli and David Mechner, Pragma’s CEOs, spent two hours in the firm’s spacious New York offices introducing me to that world.

Manchester City Swing Traders: Mining Gains In The Forex Market

High-frequency traders, Rivelli and Mechner explained, generally fall into one of two camps: proprietary trading shops that act as electronic market makers, hedge funds that use computers to automatically generate and settle buy and sell orders throughout the day, and hedge funds that specialize in statistical arbitrage. , seeking to exploit pricing inefficiencies between different securities and asset classes. The distinctions between the two are sometimes blurred, as proprietary trading firms attempt to capitalize on some of the same buy and sell signals used by statistical arbitrageurs and hedge funds that trade on increasingly short time horizons. High-frequency firms are best known for trading stocks, but they also trade futures, options and foreign exchange – basically anything that can be traded electronically. High-frequency trading is a growing global phenomenon in both Europe and Asia.

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One thing’s for sure: hedge funds don’t like to be called high-frequency traders, as I quickly discovered after visiting large quantitative managers like AQR Capital Management in Greenwich, Conn., and D.E. Shaw & Co. of New York. and Renaissance Technologies Corp.

After the flash crash, it usually took high-frequency traders no more than 400 to 600 microseconds (millionths of a second) as people tried to figure out what caused the market to fall. trade to start pointing fingers at them. “The potential for high-speed supercomputers to rig trades and create market chaos was raised again today,” Sen. Ted Kaufman of Delaware said in a statement released that afternoon. A week later, when I met with a Democratic lawmaker, he was even angrier, saying that regulators still don’t know what caused the crash.

“We have a 300-pound gorilla in the room, and we say we’re going to keep him in a cage somewhere,” he told me. “This thing is going to be 600 pounds.”

“But part of the problem isn’t there 300 gorillas?” I asked, referring to the fact that about 200 to 400 firms do high-frequency trading.

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“Good point,” he replied. “We’ve got all these gorillas, and guess what? We put them in zoos where the people who run the zoos don’t have enough information and authority to take care of them.”

Kaufman’s interest in high frequency trading predates mine. When he took the oath of office in January 2009 to replace his predecessor, Joe Biden, in the Senate, Kaufman tried to make sure everyone was in charge of 2008.

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