NY AG's New Crackdown Targets High Frequency Trading Flashcards
HIGH FREQUENCY TRADING
- Program trading platform that uses powerful computers to transact a large number of orders at very fast speeds.
- Uses complex algorithms to analyze multiple markets and execute orders based on market conditions.
- Typically trade hundreds or thousands of times per day, with a typical holding period measured in seconds or minutes.
- High frequency traders rely on early access to crucial information in the markets.
- Early access is sometimes measured in milliseconds, but for HFT firms, making rapid trades, the difference can make a significant difference in profit.
- HFT strategies earn only a small amount of profit per trade and might only make money on 51% of trades, but since the trades are made hundreds or thousands of times a day, they are consistently profitable.
- HFT improves market liquidity.
- HFT reduces trading costs.
- HFT makes stock prices more efficient.
STOCK EXCHANGE
- Does not own shares, instead it acts as a market where stock buyers connect with stock sellers.
- Several possible exchanges, such as NYSE exist.
- Usually trade through a broker.
- Important to understand the relationship between exchanges and companies and the ways in which the requirements of different exchanges protect investors.
FLASH CRASH: 6 May 2010
-Unprecedented crash in the U.S. exchange; the market levels plunged to a new all-time record point losses for a single trading day.
HOLDING PERIOD
- Used to determine how capital gain or loss should be taxed.
- Long-term investments tend to be taxed at lower rates than short-term investments.
- Long-term: think longer than one year.
CAPITAL GAIN
- Increase in the value of capital asset (investment or real estate, etc.) that gives it a higher worth than purchase price.
- Gain not realized until asset is sold.
- Capital gain may be short-term (one year or less) or long-term (more than one year).
- Must be claimed on income taxes.
CAPITAL LOSS
-Decrease in capital asset value compared to an asset’s purchase price.
PRICE EFFICIENCY ON MARKET=MARKET EFFICIENCY
EFFICIENT MARKET HYPOTHESIS:
All stocks trade at their fair value because they reflect all available information on a particular stock and/or market.
There’s strong efficiency, semi-strong efficiency, and weak efficiency.
PROFIT
-Financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.
Profit = total revenue-total expense
LIQUIDITY
-Degree to which an asset or security can be quickly bought or sold in the market without affecting asset’s price.
MARKET LIQUIDITY
-Refers to the extent to which a market–such as a country’s stock market or a city’s real estate market–allows assets to be bought and sold at stable prices.
Cash: the most liquid asset
Real estate, fine art, collectibles»_space; all relatively illiquid
COST OF EQUITY
- Rate of return an investor requires from a stock before exploring other opportunities.
- If you are an investor, the cost of equity is the rate of return required on an investment in equity.
- If you are the company, the cost of equity is used to determine the required rate of return on a particular project or investment.
Rate of return sources:
- dividends (immediate reward)
- stock appreciation (profit when they sell shares)
-Investor can never predict the exact return of stock ahead of time; can make an educated guess based on last year’s appreciation performance and overall economic trends.
dividends per share (for next year) / current market value of stock + growth rate of dividend
MARKET-MOVING INFORMATION
-Information that would cause any reasonable investor to make a buy or sell decision.
REAL ECONOMY
-Economy after adjusting nominal GDP growth for inflation.
