You have no idea just how bonkers high-frequency trading is making the stock market until you actually see it in action.
A terrifying new video by the research firm Nanex offers just such an opportunity: It shows one half-second of trading in just one stock, boring old Johnson & Johnson, on May 2. The video slows down the trades so that the milliseconds -- thousandths of a second -- tick slowly by, and so that human eyes can comprehend what's happening.
What you see is trading gone haywire, hopelessly beyond the control of any regulators that might want to make sure all of these trades are legitimate. This flood of trading confuses even other machines, creating mismatches in orders that high-speed traders can exploit, millisecond by millisecond.
"These guys are not stealing dollars, they're stealing pennies," says Nanex founder Eric Hunsader, who presented the video at a recent Wired conference. "It's like paper cuts instead of first-degree murder."
Nanex is the same firm that produced a viral animated GIF last year showing the rise of high-frequency trading robots over the years. This video offers the first clear look at what those robots are doing every day, all day, now that they control more than half of all market volume.
Inside of the one half-second of trading represented by the video, more than 1,200 orders and 215 actual trades occur, Hunsader says. (The colored boxes in the video represent exchanges, and the dots that go flying represent individual orders.)
And this sort of thing happens 100,000 times a day, Hunsader estimates.
Defenders of high-speed trading say it provides "liquidity" to the market, making orders flow more smoothly, which lowers trading costs and makes us all richer. That's debatable, particularly when the research that supposedly backs up these arguments is financed by high-frequency trading firms. And that liquidity can occasionally disappear all at once when things go wrong, leading to scary market glitches like the "Twitter Flash Crash" of earlier this month and the big Flash Crash that happened three years ago.
Regulators are desperately trying to keep up. The European Union last year approved a new rule mandating that all trades must exist for at least a half-second, in order to try to minimize the kind of quote-stuffing that frightens and confuses markets. It turns out that half-second is an eternity.
The Securities and Exchange Commission last year employed a high-frequency trading firm, Tradeworx, to help it keep an eye on high-speed trading, in a project it calls "Midas." So far the only ones turning things into gold are the high-speed traders.