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High-frequency trading is an automated method of stock trading. The decisive factor is speed: whoever has the fastest computers, the cleverest algorithms, the better data connection and the shortest physical distance to the stock exchange has an advantage. High-frequency trading often involves holding stocks for just milliseconds, before selling them on at slightly higher prices. The method can rake in considerable profits in a short period of time – but it can also wreak havoc on markets.
The idea of using algorithms to calculate probability within complex systems and forecast outcomes originated in the 1970s. Back then, a new generation of scientists first used algorithms to predict where a roulette ball would land on the wheel.
Similar methods are being used today in high-frequency trading. But critics warn that this type of stock trading has negative effects on the ‘real economy’ beyond the financial world. And some recent stock market crashes seem to have been caused by high-frequency trading. The practice is so technically and strategically complex that few people understand it, which increases the risk of manipulation. That’s why a commonsense framework for digital trading is crucial, especially as high-frequency trading has such a major impact on the economy at large.
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