Business

Faster traders take all

In a new study, Andrei Kirilenko, the chief economist at the Commodity Futures Trading Commission, along with researchers at Princeton University and the University of Washington, examined high-frequency trading in a futures contract called the e-mini S&P 500, between August 2010 and August 2012.

The researchers did something they’d never been able to do before: Used actual trading data from individual firms, though none were identified.

What that data does is help explain the frenzy in today’s markets: The most aggressive firms tend to earn the biggest profits, hence the incentive to trade as quickly and as often as possible.

Furthermore, these traders make their money at the expense of everyone else, including less-aggressive high- frequency traders.

The study found that the most hyperactive trading firms earned an average daily profit of $395,875 in the e-mini S&P 500 contract over the two-year period. First and foremost among those on the losing end: small retail investors.

The study found that, on average, they lost $3.49 on every contract to aggressive high-frequency traders.

High-frequency trading was at the heart of the so-called flash crash of May 2010, when the Dow Jones Industrial Average plunged more than 1,000 points and rebounded, all in less than an hour.

Related trading snafus have bedeviled the stock markets since then, including the failure of electronic-trading exchange operator BATS Global Markets to use its own system to take its shares public, and the near collapse of Knight Capital Group after faulty computer software made huge, money-losing transactions before anyone noticed.