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Finance

Millions of deals in microseconds

In major financial centers across the world, super computers have taken over the task of trading. Although they can perform millions of transactions in microseconds, experts say that there are still risks involved.

Although traders can still be seen on the floors of stock exchanges - buying and selling securities - their role is limited in today's era of high-speed trading, where around half of all transactions are processed by super computers, who use complex algorithms. In the US, electronic trading already accounts for almost 70 percent of all deals.

At the Frankfurt Stock Exchange in Germany, no one was willing to talk to DW on the subject. Traders prefer to keep a low profile as there has been growing criticism over high-frequency trading. Super computers used by financial institutions can, unlike people, act very fast and help traders make huge profits from small price differentials.

They are also believed to drive trades higher, which is also good for other market participants - that's the argument. Buying and selling of financial products become more efficient and cheap depending on the speed at which the trades are executed. This also puts more money into circulation on the markets, which would ultimately benefit all investors, the Frankfurt exchange stated in a written statement.

Astonishing pace

Stock markets also profit from high-speed trading, as they rent out spaces that are physically near the bourse to banks and financial institutions - because the time taken by the data to travel from a trader's computer to the one on the stock market plays a crucial role - the shorter the distance, the faster the execution of the trade in algorithmic trading.

Börse Stuttgart - Börse Stuttgart Totale
Bild: DW/ Claudia Laszczak/DW_TV

High-speed trading plays no role on the Stuttgart stock exchange

"Some transactions are carried out at an astonishing pace. We are in the range of 0.0000001 and 0.00000001 seconds, equivalent to the speed of electricity," said Hans-Peter Burghof, economics professor at Germany's Hohenheim University. The financial markets expert believes that high-frequency trading is here to stay.

But it is still unclear what the consequences of these developments will be and if ordinary investors will have equal opportunity on the markets when speed alone determines the success and failure of a trade. There are also doubts over the algorithms' ability to price stocks accurately.

An alternative approach

Some stock exchanges in Germany take a different route such as the one in Stuttgart, which is a regional trading platform, particularly for private investors. Christoph Boschan, CEO of Stuttgart's exchange, Boerse Stuttgart, says that high-frequency trading plays no role there as "private investors see little value in it."

In extreme cases, a stock market loses its original economic purpose: to bring together companies in need of credit and investors wishing to invest and thus provide the funds needed.

"A stock exchange has clear organizational mandate: To provide equal and fair access to the market for all investors, to organize trading in a fair and efficient manner, and to provide equal access to prices," Boschan told DW.

Financial experts in Germany are not overly concerned with fairness in stock market activities. They are more worried about reports emerging from the US that say high-speed trading can exacerbate crises. For instance, in May 2010, the Dow Jones index crashed by over 1,000 points without apparent reason.

Doomed to fail?

Hohenheim University's Burghof is conducting research on the impact caused by high-speed traders' actions. "Strategies are only as good as the people who programmed them. If the trader recognizes when something goes wrong, he can set up security mechanisms.

USA Obamas Wiederwahl und Wall Street - NEW YORK, NY - NOVEMBER 07: Traders work on the floor of the New York Stock Exchange November 7, 2012

Computers can never replace human traders, according to Beyer

But by that time, millions may have already been lost," Burghof told DW. But instead of imposing a ban, there should be more regulation of certain activities that could turn harmful for the economy.

According to Peter Beyer, who has more than 30 years of stock market experience working for institutions such as Deutsche Bank, Morgan Stanley and Commerzbank, computers can never replace people on the trading floor.

"Machines cannot learn over time how to identify a turnaround in the economy or market trends. Therefore, all automated systems are doomed to fail in the long run," Beyer predicts.

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