Last week, a venerable Wall Street market maker, Knight Capital, almost went under due to a mistake in one of their new algorithmic trading programs.
OK, cool, but what does an algorithmic trading program do?
The short answer is that the program fills out something called “flash orders”. Those orders are blocks of trades sent to market in less than a second — actually, in a tenth of a second.
If you want to know how that works, we highly recommend that you watch this simple video from Marketplace. It really explains how the huge bazooka that high frequency traders use every day works.
And then you can understand how easily it can misfire.
Watch the video below: