The Damage from Day-Trading

March 11, 2013 | | The Daily Beast |

High Frequency Trading (HFT) is a method used by financial institutions wherebystocks are traded in fractions of a second. The traditional means of buying and selling required bankers to manually decide whether or not something was a good investment in the (semi) long run.

HFT, on the other hand, is a completely automated process that relies on computers using complex algorithms in order to decide what stocks are lucrative to buy and sell. The catch? The algorithms only look at what is a good investment at the moment, rather than what is good in the long term.

The effect of this method is that stocks are held for mere seconds in order to make a short-term gains. In essence, HFT is day-trading on steroids. The result is quick profit for those that do HFT well, even though it undermines the real purpose of the stock market, which is investment.

As a new report from Demos makes clear, high-frequency trading definitely is the equivalent of admitting rats to a granary, as it extracts value for traders but without bolstering investment. The price of that is ultimately paid by consumers.