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Description: High-frequency trading played a supporting role in the mini market crash last spring that saw the Dow Jones industrial average plunge 600 points in 15 minutes, and yet most people know very little about this type of high-speed automated trading

Source: CBS 60 Minutes

Date: 10/10/2010

A rare look inside the secretive world of “high-frequency trading,” a controversial technique the SEC is scrutinizing in which computers can make thousands of stock trades in less than a second.

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Questions for discussion:

  • Would you classify the these high speed trading systems as functional informational systems?
  • Can you identify any downsides to using these sophisticated information systems to make financial transactions?
  • Who should make the decisions and regulations regarding these high speed trading systems?

14 Responses to “Wall Street: The Speed Traders”

  1. Brandon MacDonald

    I wouldn’t really classify the high speed trading systems as functional informational systems in the purest sense; they seem more like statistical calculators. Having so much money tied up in automated processes could be disastrous as was shown by the mini-crash. Come on people Terminator warned us against over automation – and that was in the 80s!

    It’s obvious that the government will have to step in and regulate the use of these systems, though that will probably be slow in happening I am sure that lobbyists are hard at work slowing any such legislation to a crawl. Money talks.

  2. Mitch Stevenson

    I loved the analogy that only a small amount people are “swimming in the river” of wealth. It is unfair that these people have that kind of advantage with supercomputers and a little bit of math. How can people risk any sum of money on the stock market now of days when they know that they are up against a supercomputer that is making 40 million transactions a day! There needs to be more regulation in this area of the stock market, these swimmers are cleaning up!!!

  3. Nicole

    Implementing these high speed trading systems creates added anxiety in the stock market. Information systems are not flawless which was exemplified in the May 6 mini-crash; a drop of 600 points on one stock for no reason is cause for concern. If high frequency trading is present, there needs to be government regulations in place to protect the market from unnecessary chaos. It has become too difficult for financial regulators to monitor these activities. Overall, I think these computer systems are creating an unfair advantage for businesses who can afford them. It has taken a large portion of the human aspect out of trading on the stock markets.

  4. Erika

    I think that these high speed trading systems are in fact functional. They are able to make statistically informed decisions faster than people. However, I think that there is a lot of relevant information about companies that is being left out. Statistics are a very important factor when making investment decisions, but the qualitative factors should also be taken into account, which is something the computers are incapable of doing.
    The main downside I agree is the lack of transparency. I would be less likely to invest a large amount when I do not know exactly what is going on inside the computers. I think this issue of trust will prevent some people from making future investments.

  5. Nadine

    I Definitely think that these Speed Traders are functional Information Systems. They have the algarithms to tell the computer what to do and when to do it. This makes for an easier way to deal with stocks and trades. There are a couple of downsides to this technology, for example, It is not every fair to the competitors because the computer knows about all the changes before any human being does. It also puts a lot of people out of a job. And considering who should make the decisions about the speed traders should be the creator and operators. But I do think that this type of equiptment should not be used because of its technical abilities or should be available to all competitors even though it does give this company a competitive advantage.

  6. Mark Anderson

    I would consider these high speed trading systems as fictional because they count for 70% of the trades done in the stock market today. A major downside to the trading systems would be the speed at which things are done which is essentially also its major advantage. If something were to go wrong with the market or with one of the trading programs, large amounts of damage could take place. With trading systems counting for 70% of the market, these programs could greatly affect the prices of many stocks very quickly. I think the regulations regarding these systems should be left up to the respective governments. Since governments are voted for in a democratic system they should be able to set the appropriate regulations for their people.

  7. Nathan Cornell

    I would classify these high speed trading systems as functional information systems because they have the ability to aid in decision making by using advancements in technology. These advancements give some individuals, and firms competitive advantages when dealing in the financial markets. Thus, allowing some firms to maximize their profit. The major downside is that one of these algarithms can easily screw up and contribute to a minor stock market crash like the one that previously occurred. Therefore, government regulators should step in and use strict laws to make sure that no firm is taking serious advantage of high speed trading.

  8. Chuqiao(Emma) Yu

    With the wider application of the computer use, the most stylish trading way was transformed from the Day trading to the High frequency trading in which computers can make thousands of stock trades in less than a second. As the cores of the High frequency trading systems and the functional information systems are the same, like increasing the trading speed, quality ,and creating more value for the stock dealer, there should be no doubt that the High frequency trading systems are functional information systems.
    While downsides to using these sophisticated information systems are still need the government, stock dealers and floor traders to pay attention to. Now the more governments are studying the growth of high-frequency share trading to see if regulatory action is needed because this kind of trading way causes wild price fluctuations but it is rally lead to a greater competition and liquidity. My point of view, it is not a bad thing for the financial market.

  9. Beth

    In an efficient market, there should be no advantages based on gaining public information before other traders, however these super computers are doing just that. It would be a different story if all companies or individual traders had access to these supercomputers and algorithms, but that is not the case.

    In addition, one of these computers caused a huge drop in the Dow Jones, for “no apparent reason” which goes against all principals of an efficient system. This could have huge consequences for the market, investors, and confidence in the system. There definitely needs to be more regulations for high speed trading to ensure that it is fair, non-predatory, and will not cause any further unusual market changes.

  10. Josh S

    Yes you can classify this as a high speed trading system, but not one yet that is a functional informational system. Yes both parties have different views that this is functional, but with evidence of small crashes affected by these algorithms, poses a serious question to these super speed operators.

    I believe transparency and fairness must remain at the utmost forefront for the stock business to stay functional. Before we go and let computers completely run our daily tasks, we need to make sure all parties are on board and that transparency of these systems remains an issue. Not to say that movies are an insight to how computers can run our world out of control, but any person can see that exchanging all of our human power in automated super computer systems is too soon for many industries.

  11. Paul Quick

    Yes, I would classify these high speed trading systems as functional information systems, because of their very specific functional area.

    There are several downsides to using these sophisticated information systems:

    The first downside is the possibility of a computer acting in an unforeseen or unexpected way, causing massive damage to the markets, as seen in the video.

    The second downside is the very real creation of a digital divide. A human cannot possibly compete against an expensive computer making 40 million trades per day. This leaves all other traders at an enormous disadvantage which severely undermines confidence in the stock markets and willingness to make trades.

    Decision making and regulation should be handled by a large and varied group of impartial experts. I believe that technology such as this should be researched and studied so that it can be determined how best to use it, if at all, before it can be used.

  12. Brian Rollag

    I do not believe that high speed trading is a bad thing but it needs more regulation and further “circuit breakers”. High speed trading is new and needs to be examined for its positives and negatives. High speed trading creates liquidity which is very good thing in the financial markets, also I believe if done correctly it can be used to making the markets more perfect. If they can create algorithms for this effect combined with high speed trading they could hunt out discrepancies in stock and fund prices and equalize them instantly so the market price truly reflects the companies or funds value constantly. On the down side yes not everybody is able to trade in this fashion but as the guy mentioned in the there are very few people who trade in high speed or even have the skills in math or computers to complete the algorithms necessary to pull it off. Either way I don’t believe that high speed trading will even be the same in 5 years because it is such a new technology and it will evolve fast.

  13. Jason F

    I believe that the computers are a functional information system, because they are working. This technology is perfect for a company who wants to buy and trade stocks on a minute to minute basis. When the companys focus is on having many small profits, instead of one big profit, the technology works good to accomplish that goal. the downside would be that companies are loosing out on opportunities for the big growth, because they trade the stock after any kind of profit, but if they left it for a day even, they would make more profits. When the company has the computer doing 50-70% of the work, it must be doing something right, or they would not keep them around.

  14. James Clark

    The systems seem like funtional information system. There is hardware required to run the software which uses data both sending and receiving it over a communications network. The only kink is with people. The only involvement with people would be the decisions revolving around maintenance and upgrading. So you could argue the situation both ways, because the information system in a traditional approach involves the data helping people to make informed decisions and not helping machines to make those decisions. So mabye it’s not that technology in this case is becoming outdated mabye it’s people.

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