Understanding Ultrafast Stock Trading: Strategies & Mechanics

Ultrafast stock trading is a strategy designed to take advantage of small perceived pricing inefficiencies. The goal is to identify and capture instances of mis-pricing that may persist for only a few seconds. This type of trading is usually based on mathematical models that use complex algorithms. The profit on a given trade is very small-–often less than one cent per trade. To make up for this small profit margin, these strategies trade very quickly in very high volume.

Also known as high frequency trading, this approach usually requires a significant investment in technology. This is because these strategies often trade many thousands of times per second when an inefficiency is identified. Measuring in milliseconds, making the appropriate calculations, generating the orders and delivering them to the market quickly enough are complex operations. The computing power required to successfully execute such a strategy is estimable. Even with the falling costs of technology, assembling a system capable of performing these operations is expensive for an individual. This is why you hear critics claim that ultrafast trading is unfair because it can be done only by institutions. Add to this the fact that physical location is important-–when milliseconds matter, distance to the exchange is an issue-–and few retail investors are able to compete.