I dunno shit about stock exchange, but watching movies like WallStreet, Margin Call, The Hummingbird Project, etc made me really curious that are milli seconds really that big of a deal?
In: Economics
Potentially, yes. High frequency trading is primarily about exploiting small arbitrage opportunities in markets. You realize that Person A is trying to sell a stock for $20.03 and Person B is trying to buy a stock for $20.04. If you can quickly buy that stock from Person A and pass it along to Person B, you make a neat 1 cent on the transaction. However, it’s crucial that you be the first person to get to the opportunity. It doesn’t matter if you’re a millisecond ahead or an hour ahead. Therefore, if you know your closest competition can get there in 1001 milliseconds, you can crush them by getting there in 1000 milliseconds instead.
As an aside, there’s a fair amount of debate about whether or not HFT is… useful. High frequency traders are basically couriers carrying stock from buyers to sellers (they like the term “market makers”), and their “fee” is the difference in the prices. Buyers want to find sellers and vice-versa, and high frequency traders certainly ensure that they find them quickly. However, the two would eventually meet even without HFT assistance, and it’s not clear that the milliseconds saved are worth the “fee” they take.
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