Planet Money: High-Frequency Trading In Spotlight

By Chana Joffe-Walt, NPR
10 June 2010
Listen to the Story (05:40)
Listen to the Podcast (21:56): The Million-Dollar Microsecond

The New York Stock Exchange has opened a huge fast-trading hub in an unlikely place: Mahwah, N.J., a suburb about 35 miles from Wall Street. And trading firms are flocking there to get an edge when it comes to speed.


The thousand-point, single-day market drop last month has put a relatively new breed of trading in the spotlight: high-frequency trading. It’s based on algorithms that direct computers to scour the market for tiny opportunities -make one cent here, half a cent there. The computers do that millions of times an hour at such high speeds that in the end, it adds up to real money.

Now, Chana Joffe-Walt, with our Planet Money Team, asks a simple question: Should we be afraid?

CHANA JOFFE-WALT: I ask because we’re not talking about some small, piddly corner of the market here. High-frequency trading makes up 61 percent of the trades in U.S. stocks. That means 61 percent of trades are done every day by mindless computer robots making fractions of a penny in fractions of a second.

When I say it like that it sounds kind of scary, right? Is it? I wanted to see this brave new trading world with my own eyes. I wanted to go to the spot where some of these trades are taking place. So I went not to Wall Street, but an hour and a half away to Mahwah, New Jersey – small town, population 24,000, where Mayor Richard Martel has been mayor for 14 years.

Mayor RICHARD MARTEL (Mahwah Township, New Jersey): So here we are.

JOFFE-WALT: Here we are. Oh, yeah.

Mayor MARTEL: In beautiful downtown Mahwah.

JOFFE-WALT: Is this downtown?

Mayor MARTEL: No. Mahwah doesnt really have a downtown.

JOFFE-WALT: What Mahwah does have is strip malls, lots of trees, rolling hills and a new building going up on MacArthur Boulevard. It’s right in between a frozen foods facility and a company that makes artificial limbs. The New York Stock Exchange is building something, something huge, as big as a Wal-Mart; something high-frequency traders are paying a lot of attention to.

(Soundbite of music)

JOFFE-WALT: People in town have been really curious about it. I went to the senior center and there was a dance lesson going on. Nancy Jackson was playing dominoes, and she says no one really has any idea what it is.

So do you know about the New York Stock Exchange Building down the way here?

Ms. NANCY JACKSON: The one down on MacArthur Boulevard, on the side there? Well, I dont know exactly what it is, but I know it was a big deal. But…

(Soundbite of laughter)

Ms. JACKSON: I think…

JOFFE-WALT: What do you know about it?

Ms. JACKSON: I just know it was big building that they built and that was it.

JOFFE-WALT: You know what goes on in there?

Ms. JACKSON: Not really. No, I dont. But if it’s stocks and – stock exchange, it’s got to have probably many, many documents.

JOFFE-WALT: Actually, thats exactly what it does not have. This brave new trading world does not include documents. The building down on MacArthur Boulevard is going to be the electronic center for the New York Stock Exchange. It’s basically a big, brick box that houses thousands of servers. Every trade will go through the computers in this building.

Mayor Martel is one of the few humans that has seen the inside.

Mayor MARTEL: It’s pretty nice and it’s awfully full of electronics, wiring – I mean, these are wires that were six-inches around. They’re like a huge cobra by the hundreds. It’s almost indescribable.

JOFFE-WALT: High-frequency traders want their computers to be physically close to those cobra wires because the faster their computers can get information from the exchange and then react to it, the better.

So, say the computers see an opportunity to make half a cent in half a second. And all the firms have fast computers, everyone has similar algorithms. The computers that are physically closest to exchange will win. So the firms lease space inside this brick building, inside the New York Stock Exchange for their servers to sit just a few feet away. So, should all this scare us?

Mr. STEVE RUBINOW (CIO, New York Stock Exchange): The faster we trade and the more people you have trading, any aberrations that exist in the market are taken out of the market really, really quickly.

JOFFE-WALT: This is Steve Rubinow with the New York Stock Exchange, and he says if you want to sell something, you want to buy something, those high-frequency computer are there to sell and buy from you.

Mr. RUBINOW: Which makes for a fairer market for all participants, both the people that are up to their necks in it, and people like you and me as retail customers. Those prices are about as fair as they can be.

JOFFE-WALT: No way, says Kevin Cronin. He works for Invesco. And Cronin is more like what you think of as a regular investor – manages big pension funds and mutual funds. And he says high-frequency computers watch what he does. When he starts to buy, the computers swoop in and start to buy as well, and then sell at a higher price minutes, sometimes even seconds later.

Mr. KEVIN CRONIN (Director, Invesco Global Equity Trading): They dont care about the stocks. All they care about is jumping in front of us and making a penny or two, and doing that millions of times a day.

JOFFE-WALT: That seems annoying to you. But why is that…

Mr. CRONIN: Of course it’s annoying.

JOFFE-WALT: Oh, but why is that wrong?

Mr. CRONIN: What are they doing to provide anything in the marketplace other than trying to take the information that our orders give and try to profit themselves?

JOFFE-WALT: Now, high-frequency traders counter that anyone can pay to get access to that information and that speed.

So let me leave you with what I think is the clearest complaint about this kind of trading: People don’t always understand it, regulators often dont understand it. And regulators don’t have computers that run at microsecond speeds to help them monitor what these traders are actually doing.

High-frequency traders have been blamed in part for pulling out of the market last month during the mysterious stock market seizure, and they have a favorite response to that accusation: The stock market came right back up, too, just a few minutes later, thanks to us.