High Frequency Trading
Have you ever been on a wine tour and by your 10th or 20th ‘sample’ glass of wine, you totally forget you’re there to ‘sample’ wine? Then soon after things start moving fast, too fast, and you get a ‘headache’?! (Yes, I know you have NO idea what I am talking about!)
Enter: High Frequency Trading
Similar to a room spinning outta control is High Frequency Trading.
What is High Frequency Trading?
Investopedia says it best I think:
High frequency trading is an automated trading platform used by large investment banks, hedge funds and institutional investors which utilizes powerful computers to transact a large number of orders at extremely high speeds.
Okay, maybe Investopedia is too technical for you. Here is my definition of High Frequency Trading:
High frequency trading is a way for banks, hedge funds, pensions, or people and organizations with gazillions of dollars which have the ability to sneak in one or multiple trades in the time it takes you to hit enter on your stock trade to the time your order has been filled, usually seconds, using super high tech computers and servers, and capitalize on the slower-average computer trades. In other words, they have the ability to cheat the system in a legal kinda way by budding in line a few times before you get your order in.
So what does this mean for you?
If you don’t do online stock trading or investing at all, then this means absolutely nothing!
(You can quit reading, have a glass of wine, and pat yourself on the back for learning a new word today!)
If you purchase mutual funds, then you have the huge organizations moving tons of money with the aim to make money on your side and they are usually big enough that high frequency trading does not affect them (or honestly, some may be utilizing high frequency trading).
Good, bad or ugly, high frequency trading is a real thing, although what negates this whole conversation is if you don’t have any money invested or if you invest for the long term. In other words, if you buy and hold quality companies in your portfolio, then the high frequency trading really shouldn’t do too much damage to your portfolio, unlike people who trade personally and more frequently.
However if you do online trade, you need to be aware of this if you are placing market orders and learn more about it. (If you trade, you know what I’m talking about. I’ll save the stock trading course for someone else to teach!)
BOTTOM LINE: High frequency trading is something to be aware of if you are trading for yourself, however, if you are buying and holding stocks or quality investments long term, then it shouldn’t affect you over the long run.