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The flatness of being a high-frequency trader
A common claim made by the high-frequency trading crowd is that their funds end the day flat–with little overnight exposure to a given stock.
In other words, high-frequency traders argue they always manage to find some other sucker–I mean trader–to layoff their positions on before shutting down their algorithims for the night.
It’s a claim that sort of defies logic when you consider that most high-frequency traders compare themselves to good old-fashioned market makers–firms that put their own capital at risk to make markets in stocks. Based on that logic, it would seem high-frequency traders would need to go home at night with a sizeable exposure in certain stocks based on trades they did with other parties.
But a story in The Wall Street Journal helps explain how high-frequency traders can make this claim and why these rapid-fire, computer driven traders really aren’t classic market makers. The WSJ story points out that most rapid-fire algorthimic trading is in highly-liquid big-cap stocks–not less liquid small-cap stocks.
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The Wall
