On the morning of January 28, 2021, you might have been staring at a plummeting red line labeled GME. Gamestop, which had been successfully revived by loyal supporters and small investors, reached the end of its vertiginous upward climb and abruptly collapsed 154 points in one day. Ryan Kiernan, a rising freshman at UCLA who had been trading for the past year, got swept up in the fray and bought $1,000 worth of the share the day before.
“When the Gamestop phenomenon was big, [I’ll] be honest, I was pretty lost,” said Kiernan. “During that time period, I perceived the market to be no different than playing a game of Blackjack and hoping for the best.”
Kiernan’s experience epitomizes the frantic, unseasoned decision-making which many investors were making at the time. Paired with the immense increase in day-trading as a result of the pandemic, many traders new to the financial world were dealing with the stress of a rapidly descending stock at the same time.
“Finance is indisputably becoming more democratized with the advent of financial technologies increasing accessibility,” said Peter Bowman-Davis ’25, who witnessed an uptick in investors amongst his social circle. “Whether this be [transaction-free] investment apps with sleek looking UI’s, or even novel financial instruments like SPACs which can allow a retail investor easier access to IPOs or privately held companies, it is clear that more and more amateur investors are entering the scene.”
Indeed, platforms like Robinhood, catered to novice traders, witnessed significant booms in activity during the quarantine.
Yet these accessible platforms, responsible for the remarkable upheaval of Gamestop’s stock, rarely lead to much displacement in the market. Wall Street is still controlled by top investors. In 2019, the U.S.’s top one percent controlled 38 percent of accounts holding stock; the top ten percent controlled a whopping 84 percent.
However, the Gamestop revival can provide one important lesson.
“The scenario with GameStop really made it clear just how fast people can join together and cause massive sways in the market,” Kiernan said.
Most of the time, though, these massive sways don’t come from small investors banding together to make change. They can now be the result of a click of the mouse. These rapid trades emphasize the exclusive, cyclical nature of the stock market where the rich prosper from the wealth they invest while the poor usually lack access to any sort of leverage.
The advent of new digital technologies has transformed almost every industry and profession. Economics is no exception. Gone are the days when traders bickered at the ground floor of a physical building on Wall Street—anyone can now own a portfolio if they have a device and some spare money to invest. Despite this democratization of trading, top investors can ensure continued domination over the market by owning certain technologies which operate at lightning-fast speeds. One part of the massive and gradually widening gap between novice investors like Ryan and the top one percent comes down to High-Frequency Trading (HFT).
HFT is a type of automated trade that employs highly developed artificial intelligence, complex algorithms, and infinitesimal rates of submitting orders to understand and act on fluctuating markets across the world. Hedge funds and advanced traders primarily use HFT to spot discrepancies and loopholes in the market which most ordinary investors miss. What is most noteworthy about the process is the sheer speed at which it is executed and the methods that investors have been willing to pursue to maximize profit.
On average, trades are done in one 64 millionth of a second, though even at such a mouth-dropping rate, some investors try to inch out their rivals even more. Sterling Professor of Economics Robert Shiller explains in his Financial Markets course that “people are installing fiber optic cable so that they can be a millisecond ahead—in other words, there’s already a fiber optic cable leading between two cities, but somebody says, ‘Yeah, but it’s not the straightest route and if I cut it off a little bit straighter, I can get a whole millisecond. That’s a gold mine to me.’”
High-speed traders have also migrated to various locations closer to the NASDAQ or NYSE exchanges in order to speed up their operations. The closer an investor gets to New York, the more efficient he or she can expect to be. It comes down to what can save even the most microscopic fraction of time to avoid stunning financial losses.
The technology alone is not problematic, since professional traders are only taking advantage of electronic development which already exists to generate economic gain. The issue arises when investors exploit their use in a way that negatively impacts novice day traders like Kiernan. Financial security should be a top responsibility not only for political leaders, but for the market itself. Due to HFT, investors with access to high-speed technology choose when and to what extent they will move the market, creating a system of dependency and diminished financial security.
In addition, according to Bowman-Davis, “There are lower transaction rates for higher value investors, and trades can be carried out more reliably by allocating more money into purchasing server infrastructure which complements the physical locations of the exchanges.” Proponents of HFT cite this fact as advantageous for traders with little experience since they can profit from massive shifts in the market, though an equally devastating outcome can occur if the market plummets.
HFT is an important process that both dedicated investors and individuals who are indifferent to the sways of the market should examine. One major reason is that the process harbors a fundamental, ineluctable contradiction that goes against one major principle of the stock market: no insider trading.
“HFT aims to privatize public information for just long enough to profit and in so doing public and equal are no longer the same,” wrote Matthew Zook from the University of Kentucky and Michael Grote from the Frankfurt School of Finance and Management. The speed at which high-frequency traders are able to place their orders is unmatchable for other economic actors, creating a sort of sphere of control that leads to economic and information inequality. In essence, this is similar to participating in insider trading, which is when an investor with undisclosed information can make advantageous decisions on the market.
The result is that these omnipotent economic actors drag a helpless population into a variety of frantic market oscillations. It is widely speculated that HFT led to a flash-crash in 2010 where a single $4.1 billion trade caused the Dow Jones to drop 600 points in just a few minutes. Novice economic actors like Kiernan are at the mercy of these split-second decisions, which poses an enormous risk for many American families, especially since there are more inexperienced traders than ever due to the proliferation of user-friendly platforms like Robinhood.
“As the barrier to entry lowers, I believe that more and more of the common audience will be prone to manipulation by influential voices in the financial sphere,” said Bowman-Davis, who cited celebrities “advocating for the merits of a complex financial instrument” as an example of this newfound financial democratization and dependency.
William Serrano, a California high-schooler who has taken advantage of accessible platforms to pursue his passion of investing, echoed Bowman-Davis’s point. “I have recently been getting into cryptocurrency, which is probably the highest risk form of investing, due to the constant fluctuation often dictated by what celebrities post on social media,” he said. Serrano’s interest in Bitcoin, fueled by celebrity influence and HFT’s unpredictable swings, can be dangerous for inexperienced investors.
One solution to addressing the instantaneous nature of HFT, proposed by Professor Shiller, is that “instead of every millisecond trade being executed as soon as it’s received, you have them wait maybe a full second or maybe even 10 seconds.” This solution would mitigate at least one component of the widening gap between professional and amateur investors that HFT exacerbates.
In addition, individuals who are just beginning to invest in the market can avoid finding themselves in an all-or-nothing situation like Ryan did by not putting all of their eggs in one basket. “So many people got into investing just for [Gamestop] and some ended up investing close to their life savings because of predicted gains,” Matthew Luulay ’25 said. “Even though those stock prices [were] high at the moment the risk was too real…. and many investors lost large sums of money. It’s events like these that demonstrate the importance of diversification.”
Many amateur investors can easily adopt Luulay’s solution. Choosing to diversify one’s portfolio, keeping in mind that some stocks will swing due to processes like HFT, will minimize risk in the long run. As economic inequality continues to increase and Americans decide how to invest their saved money during the pandemic, more restrictions should be placed on technological processes like HFT to discourage abrupt shifts in the market that can jeopardize amateur traders.