In his book The Speed Traders (McGraw-Hill, 2011), Edgar Perez ’02 shares the ins and outs of the fastest thing to ever hit the stock market high-frequency trading. The former McKinsey and IBM consultant honed his knowledge of computerized buying and selling while interviewing traders and investors through Golden Networking, an organization he started that holds conferences, workshops, and networking events for finance professionals worldwide.
Perez’s book offers readers a breakdown of high-frequency trading, the new regulatory issues it presents, and tips on whether these lightening trades should be part of their toolkit. He has enjoyed success at home and beyond The Speed Traders has been published in both Chinese and Bahasa, an Indonesian dialect and led to being featured in the New York Times and on CNBC, among many other media outlets in America, Europe, and Asia.
What is high-frequency trading?
High-frequency trading is basically the evolution of trading. In the past, humans coordinated the buying and selling of securities. Now computers can also make decisions on what to buy and sell and when to execute. Of course, we as humans are usually slower; with computers, these transactions happen in microseconds. That’s the key difference with speed trading.
This type of trading is becoming a dominant force starting with the equity markets. If you look at the US, for instance, high-frequency trading was not prevalent at all 10 years ago. Now it has a 50 to 60 percent share of participation in the markets. In Europe, its participation exceeds a third of all volume transacted.
Why is real-time regulation so important in high-frequency trading?
If you look at how regulation is conducted at the moment, you see that people analyze activity after it happens. The perfect example of this is the Flash Crash, an incident in 2010 when the Dow Jones dropped almost 10 percent and then immediately went up again all in 20 minutes.
It took almost five months for the SEC (Securities and Exchange Commission) and the CFTC (Commodity Futures Trading Commission), the top US regulatory bodies, to analyze those 20 minutes, figure out what really happened, and publish a report. Why? Because regulators follow these events through a delayed process. They didn’t have access to the information they needed to analyze the incident, not even the day or week after. Then when they finally received this information from the trading firms, it took them a long time to consolidate the data from the different trading participants.
That’s why we need to develop the technology that will allow regulators to look at trading activity in real-time that’s the only way to identify and pursue any misguided trading or manipulation in the markets. The SEC and the CFTC need to request market participants to invest in this type of infrastructure to be sure that this type of activity is discovered in real time and stopped before erroneous trading risks the integrity of the markets.
What’s your number one piece of advice for readers thinking about getting involved in high-frequency trading?
Obviously there’s going to be a lot of opportunities in trading whether you want to be a long-term investor or a short-term investor; the latter is the purpose of high-frequency or speed trading, an endeavor that requires a significant investment in technology infrastructure that not all investors are willing to stomach. There will always be opportunities in the long-term investing category I think Warren Buffett will continue to be the most successful investor of all time just as there will be in high-frequency trading. So I think the best piece of advice is to position yourself in the investing space that you’re most skillful and familiar with, and that meets your personal goals, and pursue that path.
After the success of the book, any plans for another project in the future?
Based on the structure of the book, I developed The Speed Traders Workshop, a one-day program that introduces traders and investors to the world of high-frequency trading; so far, I have presented to audiences in Hong Kong, Sao Paulo, Seoul, Kuala Lumpur, Warsaw, Kiev, Beijing and Shanghai, and expect to add new cities in the next months.
I’m also in the process of writing a book about the Knight-Capital incident in August 1, 2012. Knight-Capital was one of the biggest market-makers in the industry, and unfortunately there was a glitch in their trade system: they released a number of orders they didn’t intend to, so at the end of the day they had to sell at a loss. The company, which had a market value of $1.2 billion, lost $440 million in 45 minutes. They were able to survive and are even doing well now, but their original shareholders pretty much lost everything. My book will be published next year. The tentative title is Knightmare on Wall Street.