If you’ve scratched your head this week about all the talk around high-frequency trading, you’re not alone.
High-frequency trading, a practice that has become increasingly common in recent years, has gained more mainstream attention thanks in large part to Michael Lewis, the author of popular books like Moneyball and The Big Short. His new book, released Monday, is called Flash Boys and takes a critical look at the risks of high-speed trading.
At the same time, the FBI recently confirmed that it is looking into the practice of high-speed trading to determine whether traders are breaking the law by having access to non-public information.
To help explain what high-frequency trading is, how we got to this point and why the government is taking notice, we reached out to Charles Jones, a finance professor at Columbia Business School. Here is a lightly edited transcript of that conversation.
Mashable: First things first: Can you give us a brief explainer on how high-frequency trading works?
Jones: It’s a computer program that is programmed to trade in and out of stocks pretty quickly, with holding periods measured usually in seconds to minutes, rather than in days and weeks. These guys are doing a couple of different things: They are the new market makers. They are willing to buy and hold onto the shares for a few minutes until they can find another buyer who wants to hold it longer term. They are also often trading on small imperfections where prices aren’t exactly the same in two markets.
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