The justification for high-speed computer trading has been the efficiencies and lower costs it would create. But complexities in the marketplace have also increased and it’s negating—or perhaps even reversing—those cost saving effects.
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Trades now are executed within millionths of a second. Between 2000 and 2010, trading costs per share indeed fell to about 3.5 cents per share. But costs have risen since then to about 3.8 cents per share. This coupled with multiple recent malfunctions in high-speed trading programs have brought the practice under investigative eyes.
So many of these programs have been created that competition is measured to a level where it no longer is an advantage to investors. High-speed trading firms now comprise over half of all shares traded. That’s almost double the amount in 2006.
When floor specialists on exchange had to begin competing with computers in 1998, they were forced to lower their prices. Technology also increased the amount of shares that could be traded each day, facilitating institutional investors’ ability to move in and out of the market more quickly.
New rules have been created to address unorthodox trading that has sprung up and legitimate firms are scrambling to rewrite their programs to accommodate them.
Traditional exchanges have also begun selling their own trading technology to make up for lost profits.
The benefits of computerized, high-speed trading are coming into question
and, for the first time in their history, are seeing costs level off instead of continuing to decrease.