Tristan de Gouvion Saint Cyr talks
about an investment trend in today's markets: HFT.
The post-2008 market condition saw a
drastic increase in volatility which lead to challenge market players, and find
new solutions to benefit from this new environment.
Tristan de Gouvion Saint Cyr quotes
Wikipedia: "Algorithmic trading, also called automated
trading, black-box trading, or algo trading, is the
use of electronic platforms for entering trading orders with
an algorithm which
executes pre-programmed trading instructions whose variables may include
timing, price, or quantity of the order, or in many cases initiating the order
without human intervention.
Algorithmic
trading is widely used by investment banks, pension funds, mutual funds,
and other buy-side (investor-driven) institutional traders, to divide large
trades into several smaller trades to manage market impact and risk.[Sell
side traders, such as market makers and
some hedge funds, provide liquidity to the market, generating and executing orders
automatically.
A special
class of algorithmic trading is "high-frequency trading"
(HFT). Many types of algorithmic or automated trading activities can be
described as HFT. As a result, in February 2012, the Commodity
Futures Trading Commission (CFTC)
formed a special working group that included academics and industry experts to
advise the CFTC on how best to define HFT. HFT strategies utilize
computers that make elaborate decisions to initiate orders based on information
that is received electronically, before human traders are capable of processing
the information they observe. Algorithmic trading and HFT have resulted in a
dramatic change of the market micro structure, particularly in the way liquidity
is provided. Algorithmic trading may be used in any investment strategy,
including market making, inter-market spreading, arbitrage, or pure speculation (including trend following).
The investment decision and implementation may be augmented at any stage with
algorithmic support or may operate completely automatically.
A third of
all European Union and United States stock trades in 2006 were driven by
automatic programs, or algorithms, according to Boston-based financial services
industry research and consulting firm Aite Group. As of 2009, studies
suggested HFT firms accounted for 60-73% of all US equity trading volume, with
that number falling to approximately 50% in 2012.
One of the
main issues regarding HFT is the difficulty in determining how profitable it
is. A report released in August 2009 by the TABB Group, a financial services
industry research firm, estimated that the 300 securities firms and hedge funds
that specialize in this type of trading took in roughly US$21 billion in
profits in 2008.
Tristan de Gouvion Saint Cyr investment portfolio management expert. Tristan de Gouvion Saint Cyr financial analyst.
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