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Trading Shares in Milliseconds

By Technology Review
December 23, 2009
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Today's stock market has become a world of automated transactions executed at lightning speed. This high-frequency trading could make the financial system more efficient, but it could also turn small mistakes into catastrophes.

If Manoj Narang is about to bring down the markets, he's certainly relaxed about it. Narang, who wears a goatee and wire-frame glasses, is casually dressed in a brown shirt and dark gray sweatshirt. Sitting on a swivel chair with one leg tucked under the other, he seems positively composed, especially for a man who has just bought and sold 15 million shares with a total value of $600 million.

For Narang, however, such volume represents just the start of a normal day. Though it's about noon on a Friday morning, he has barely begun.

Narang is the head of Tradeworx, a hedge fund and financial-technology firm that makes purely automated trades; all decisions are reached and acted on at near light speed by computers running preprogrammed algorithms.

"Actually, we run two businesses," he says. "The first trades in and out of shares in about a second and holds them for an average of two or three days. That's the medium-speed fund. The high-speed fund could make thousands of trades a second and holds them for a matter of minutes."

By the end of the day, his computers will have bought and sold about 60 million to 80 million shares, with the heaviest activity in the last hour of trading, from three to four in the afternoon.

TheTabb Group, a consultancy based in Westborough, MA, estimates that high-frequency automated trading now accounts for 61 percent of the more than 10 billion shares traded daily across the numerous exchanges that make up the U.S. market. Tabb estimates profits from high-frequency trading in the first nine months of last year at $8 billion or more.

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