Why Do Financial Companies Use High Frequency Trading?

The years 2008 shined a light on a group of people who were considered high society. When the stock market crashed in September 2008, the world shines a spotlight on the financial corporation. Words such as hedge fund manager and financial instrument such as credit default swaps are not words not known to everyday citizens. The economic downturn forced society to ask question not normally asked.

The United States economy along with most developed countries experience cycles of booming years, which are also subject to periods of economic contractions. The cycles in an economy are dependent on many factors and recognizing historical trends can provide forecasts to where an economy is heading and reduce recurring mistakes. Mark Twain once said, “History does not repeat itself, but it occasionally rhymes.” (Carr) The Great Recession of 2008 precisely emphasizes Twain’s historical understanding with respect to the Panic of 1907. Almost exactly 100 years after the financial crisis of 1907, the poem known as The United States economy, holds a stanza rhyming it with the 2008 financial crisis. The tail of these two events is compared to better understand the elements in an effort to rhyme the next line of the poem with a new set of syllables. Before understanding these elements, a financial crisis is defined as “A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution. (Investopedia)

Rich's editorial on the 2009 Wall Street economic crisis, which focuses on the deleterious ramifications of the economic collapse on the American citizens, and the contrary prosperity of banks and the central government, presents at its forefront the propositions that the banks of the nation had, at that time, been profiting at the expense of the people, and that the financial statuses of the banks and the citizens are in fact cyclical, implying that a reversal of financial prosperity had been in order. In light of recent and present economic circumstances, Rich's claims demonstrably and logically hold up. Namely, the effects of the 2009 economic crisis are ever-present and undeniable, the citizens had been suffering and wallowing in debt while

Since the creation of stock exchanges in the 13th century, the stock market has played a vast role in our history. It’s the aggregation of buyers and sellers of stocks or shares; these may include securities listed on a stock exchange as well as those only traded privately. The biggest crash in history took place in 1929. Depression consumed the people and the economy was at its nadir. In 2008, another crash took place. Still today we can look back and see how it has shaped the world in a negative way.

Moreover, the stock market crash in 1987 was a shock of stability of the financial system, not only because of the substantial price drop but also, we can clearly see that our functioning systems are significantly flawed and can later be perfected for a better future. Therefore, we learnt more than technical flaws, further improvements of our daily systems have to be made for a better

The current financial crisis of the United States, began in 2007. The numerous issues, giving rise to the crisis, brought focus on the subject of proprietary trading. A history of the events contributing to the financial crisis illustrates the role proprietary trading played, and the reasons Congress and regulators have proposed limits on such activity.

The 2008 financial crisis was one of the worst economic times since the 1929 Great Depression. It led a worldwide economical, social, and political instability that shook the very foundation of the term “laissez-faire”, or free market. Millions of people around the world lost their homes and their jobs, while large corporations and entire countries were at the brink of insolvency. Others, who are as unfortunate, lost their life savings and pension funds. But it is important to question what led to the events toward the collapse of the world wide financial system.

In the following essay, I will briefly summarize some of the main events leading up to the global financial crisis. Following this, I will discuss the effect this had on the banks and ergo the credit supply, then examine how this contributed to the corporate failure. I will also pay some attention to how the market imperfection can affect firms real decisions. Finally, I will sum up the main points of the essay.

During the run-up to the Global Financial Crisis (GFC) 2008 there were numerous contributing factors. One can observe the start of the crisis as a cascading timeline starting possibly decades earlier with the change to a deregulatory culture. The prevailing political environment in the lead up to the financial crisis was one of de-regulation with a focus to economic expansion. This political imperative towards deregulation started under President Reagan in the US and culminated at the turn of the century with the actions such as the repealing of the Glass Steagall Act. The economic environment in the run-up to the GFC was, as Mervyn King put it, a NICE period, No Inflation Constant Expansion, with the general opinion being that markets were on the up and would be so indefinitely. This environment lead to a lackadaisical attitude towards regulatory standards and circumvented caution in regards to the occurrence of financial crises.

A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple effect around the world. Furthermore, other weaknesses in the global financial system have surfaced. Some financial products and instruments have become so complex and twisted, that as things start to unravel, trust in the whole system started to fail.

We are now in a state of experimentation, ‘in which the conjuncture of the strange and the familiar, of the stasis and metaporphosis, plays tricks on our perceptions, our positions, our praxis.’ (Comparoff Pg.3). The Financial crises of 2008 has had a major impact on the lives of individuals, for some it has been beneficial for others dire. Many people no longer have faith in the ‘capitalism that presents itself as a gospel of salvation’ (comaroff review, find) and are embracing alternatives to lassaire faire capitalism. The crises has seen the rise of anti-capitalist movements such as ( people before profit) offering an alternative vision to mainstream capitalism. In the EU the crises has forced people to look at alternative solutions,

With what started as one lender’s possibility of going bankrupt soon began to look like a major systemic risk issue on Wall Street. United States Government Leaders were left with tough decisions. Treasury Secretary Henry M. Paulson Jr had some of the toughest decisions to make during this time, make the lenders pay for the mistakes and go bankrupt or have the government assist them and provide them in order to stop what looked to be another great depression. Moral hazard, a situation in which a party is insulated from the consequences of its actions; thus protected, it has no incentive to behave differently, (Ahrens, 2008) was often the topic of discussion and reasoning behind his decisions for Paulson.

Since the global financial crisis of 2007/8 many European countries have been struggling to recover their economies and regain economic stability. Since the crisis we have seen several Eurozone countries go into administration and be bailed out by financial institutions and other countries, however these attempts to regain stability in the Eurozone have not worked as effectively as many governments and central banks had hoped. On the 4th of September 2014 the European Central Bank (ECB) cut its benchmark interest rate to 0.05%. It will also launch an asset purchase programme, which will buy debt products from banks, the asset purchasing programme more commonly known as Quantitative Easing (QE). Using

As we known, high frequency trading (HFT) means using powerful computer to transact a large number of orders at a very fast speed. Normally, traders with faster speeds are more profitable than those with slower speeds. Nowadays, about 70% of trading in U.S. is HFT and usually people think HFT is beneficial for the markets. However, in Michael Lewis’s book, Flash Boys, HFT is described as a contributor to the rigged markets. Mr. Lewis told us a story about Mr. Katsuyama in this book. Mr. Katsuyama was the head of equity trading of the Royal Bank of Canada and he found some HFT companies used the time difference among the time when normal traders received the transaction data to make money. These companies could buy the stocks at lower

The Securities and Exchange Commission (SEC) has approved a new, six-month “circuit breaker” rule, which is also known as limit up/ limit down. It stated that the exchanges would pause if the trading in a stock declines more than 10 percent in any five-minute interval. This reaction has changed previous circuit breaker rule. According to Bob Pisani, the writer of “ Flash Crash 5 years later: What have we learned?” published on CNBC on May 5, 2015, claimed “five years ago, each exchange had its own rule that governed when individual stocks would be halted for sudden volatility.” But this rule is confusing and now it has been eliminated. The new consistent system-wide circuit breakers rule is for all individual stocks, and other revised market-wide circuit breakers that will kick in when the S&P 500 drops 7 percent or more during the trading day.