Ever run into a pricing mistake at a grocery store? You bought your favorite name brand item super cheap because the store made a mistake. Later in the week, you notice the same item at another store for a different, and higher price.
In the world of finance, this is what arbitrage trading programs do. Only with 10,000 times more configurations. Think: bundles of sugar, wheat and frozen concentrated OJ packaged against call options on natural gas which correlates prices with these foodstuffs...Algo programs keeps an eye on the market to find assets that are mistakenly priced or priced differently in different places.
Arbs then profit by buying at the lower price and selling at the higher price at the same time. Speed is important because these mistakes are picked up VERY quickly. The computer is much faster than you are (obviously), thus giving you the chance to take advantage of opportunities that will be gone in a matter of moments.
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Finance: What is the Fast Market Rule?11 Views
Finance a la shmoop what is the fast market rule? okay things get crazy here [Two guys riding a rollercoaster]
whoa and every now and then there's a leap well blimey, that's how things work
here on the London Stock Exchange.....
the fast market rule accommodates the chaos by giving brokers and other market
makers the freedom to trade outside the ranges published to the exchange why is
this needed? well because we live in a world of robots and artificial
intelligence and fat thumbs that hit the wrong keys and hackers from Russia China
and Mars all of whom can profit from chaotic disruption if you want to see
this phenomenon in its finest form well check out Jack Nicholson in the original [Man stood next to Jack Nicholson as Joker]
Batman movie and that was the best one so the logic revolves around the fact
that today even with all our massive computing power we would still rather
rely on human beings when you know the congressman hits the fan then assume
that a computer will be clever enough to figure out what's wrong quickly you know
when the world is on a collision course with chaos all over the place fast [Meteor strikes Earth]
market rule, humans over robots...
Up Next
What is Arbitrage? Arbitrage is a trading strategy used to make risk-free money. The investor buys a security in one market and sells it in another...
What is the Historical Trading Range? The historical trading range is just the collection of prices a security has been trading at since its IPO in...