Nasdaq glitch

The NASDAQ Glitch: What does it mean?

We’ve all been there: you’re poppin’ some popcorn, getting ready to start a Mad Men marathon on Netflix, and boom! You’re computer glitches.

Well, imagine if that same computer glitch prevented millions (it’s not all about you, stop being selfish) of people from using their computers at once. And also factor in that all of these people were investors looking to buy and sell shares of companies.

It sounds like a nightmare. And that nightmare became a reality on Thursday, when the Nasdaq exchange – which allows brokers to trade stocks of companies like Apple, Microsoft and Facebook – was shut for three hours!

During those three hours, no one could buy or sell shares in the 3,000 or so companies listed on one of the most important stock exchanges in the entire world.

The cause of the problem remains murky – sources have explained it as a connectivity problem between some sort of data processors.

But many traders and investors were quick to lay the blame on the rise of high-volume, computer based trading that has taken the human element out of playing the market. This is known as high frequency trading, of HFT.

“As we continue to eliminate human beings from the execution of security trading, this is the problem you run into,” Stephen Massocca, managing director of Wedbush Equity Management LLC in San Francisco said to Reuters. “These events are going to take place, given the level of automation.”

High frequency trading

High Frequency Trading at it’s best (worst)

In the not-too-distant past, stock prices were bought and sold by actual people who had some inkling as to whether it was time to – hopefully – buy low and sell high.

Investors and traders started using computers more and more to keep track of stock prices and other data. Soon, a lot of brainy people started to take this data and use it as a way to predict future prices of stocks by developing complex mathematical formulas known as algorithms.

Now, a computer software program can buy or sell shares of stocks based on various algorithms. These programs also cost huge sums of money to create. They’re not the toys used by those who watches CNBC all day. They’re not even sused by the average broker who sits behind a desk at an office park.

Instead, these programs are used by deep pocketed hedge funds, investment firms and others with the ability to buy or sell hundreds of thousands of shares at a time – without any human interface whatsoever.

This form of high-frequency trading has made the market faster. But it’s also increased its vulnerability. Computer glitches stalled trading on the first day Facebook shares were publicly traded, one of the most widely hyped Initial Public Offerings in recent history, for instance.

But Thursday’s was the biggest problem to date. Wall Street executives and government officials say they’re doing their best to quickly install safeguards preventing computer glitches from stalling markets.

But, chances are, this’ll happen again.

Is high frequency trading getting too dangerous for even Wall Street to handle? Let us know what you think in the comments section below.

Learn more about the problems with High Frequency Trading in this tell-all book by Haim Bodek, Goldman Sachs insider and foremost expert in HFT. 

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