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The Bureau of Investigative Journalism (TBIJ

Robot Wars: How High Frequency Trading Changed Global Markets

Alice K Ross, Nick Mathiason and Will Fitzgibbon

A controversial trading practice may be living on borrowed time (Photo: Shutterstock)

Welcome to the world’s most intense electronic battle. It’s waged on world stock markets and the ammunition is tiny fractions of pennies, fired through super-charged computers. The object is to wipe out the opposition.

The theatre of war is a long way from the raucous bear pit of baying stock traders. Instead, capital is unleashed in a cavernous space, lined with banks of computer servers and chilled by air conditioning. Rather than the shouts of traders, orders to buy and sell come in electronic pulses; processed instantly in near-silence.

‘It’s high tech war,’ explained a City computer expert working for an investment bank. ‘When they’re doing a trade, they can blast it with full volume so you can’t get up.'

Buy low, sell high remains the market’s mantra. But the age of computer-driven trading has ushered in speed and processing power. Trading times have accelerated exponentially. Markets are so fast today, a trade is now measured in microseconds – millionths of a second.

Allied to speed is staggering computer processing power. Now processors can assimilate transactions made on virtually every single exchange and assess who made the trade, all in the blink of an eye. This gives investors more ammunition in their battle to outmanoeuvre and second-guess rivals.

At this level, humans are out of the game. Instead, investment banks, fund managers and traders put all their trust on complex algorithms run by computers to buy and sell shares, with varying degrees of human involvement. And the fastest players of all are a new and evolving breed of market participant: the high frequency traders.

In the past five years, high frequency trading (HFT) has stormed the citidels of finance. Today it accounts for more than a third of activity on European markets and 70% in the US. Its dramatic rise to prominence has polarised opinion. Exponents say it has reduced trading costs and increased activity on markets – but critics point to two devastating US market collapses in which HFT played a central role. And now European policymakers are debating whether to impose severe limits on HFT. Influential figures are even calling for it to be banned.

Read the full investigative report at The Bureau of Investigative Journalism.

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