Algorithmic trading seems to have lead to a high-stakes “cat and mouse” game between large mutual funds and trading firms. Muitual fund managers say “algo” traders try to detect when mutual funds are placing buy orders and move quickly to buy shares in anticipation of selling them rapidly for a profit.
Thirty-eight percent buy-side money managers—typically long-term investors—say they have a more negative view of high-frequency trading than before the flash crash, according to a recent survey by Tabb Group, while 17 percent expressed positive views, the Wall Street Journal reports.
Algorithms are expected to account for about 60 percent of stock trading this year, up from 28 percent in 2005, according to Aite Group, a Boston firm that tracks electronic trading.
An escalating arms race has been the result, with players on both sides plowing money into ever-more-powerful technology to trade effectively. The obvious move to lower-latency communications is a direct result.