The lightning-quick pace of computer-driven high frequency trading is changing the landscape for hedge funds. High-frequency trading now accounts for some 60 percent of total U.S. equity volume, reports Reuters, and it’s creating a legion of both supporters and critics.
Some of the big names in the growing category include trading houses Getco and Tradebot, along with hedge fund Citadel Investment Group and trading desks at Goldman Sachs and Citigroup.
High-frequency traders use pattern recognition software to create complex algorithms that anticipate trading patterns in the market. Some of the techniques include “market making,” where firms trade more than 1 billion shares per day, holding positions for just seconds, and gather rebates from the exchanges for posting orders. Even with profits as tiny as one-tenth of a penny per share, the speed and volume at which the trades are executed can lead to sizable returns.
Critics worry that uber-fast trading may undermine the integrity of U.S. equity markets, increase market volatility or create another financial meltdown. Supporters claim they’re simply providing necessary liquidity to the markets, and represent the evolution of trading in an open, capitalist economy.
As you would expect, math whizzes, usually under the age of 30, a prime candidates for these hedge fund jobs. Many are hired straight out of university so as to not “taint” their work habits and philosophy. The few firms doing the hiring can afford to be selective, however. Last year, just 6 candidates out of 1,500 resumes submitted landed jobs at Tradeworx, one of leading firms, based in New Jersey.
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