they may or may not enjoy it. >> well, we have enjoyed it for a long time, and we will for many many years in the future. >> great to see you, thank you. alley is next. i'm david shuster in for ali velshi - on target man versus machine, how a need for speed turns america's stock market upside down. and meet the computers that can make hundreds of million in milliseconds for investors in the stock market the past month has been

brutal. the s&p dropped steadily since interest rates have been raised. markets in japan, brazil and others saw market fall 30%. a definition of the bear market. if you trade stocks, or participate times like these can try your soul. lately we have heard talks about china's economic slowdown, and the price of oil dropping stacks further. tonight, we are going to talk about another factor that might be feeding some of this volatility. to do that we want to draw comparison to global warming. as soon as we agree global warming is happening, if you believe the planet is heating up because of human activity, global warming is causing more weather volatility, more hurricanes, blizzards and typhoons. critics say the stop market is blowing up its own storms

because the traders buying and selling larger volumes of shares. in particular critics point to high frequency trading. hundreds of trades. tens of billions are conducted every day with price movement measured in fractions of a penny. the high volume speed will heat up markets and exaggerate price swings, making for a market filled with hurricanes, blizzards and typhoons. if you stay in it, you better be prepared to ride out the storms. all this speaks volumes about the transformation that stock exchanges have united gone in recent years. as ali velshi reported in 2014, it's because the need for speed is the holy grail for market traders. >> reporter: back on december 5th, 2013, something remarkable happened at the closing bell. on that day a company called

ultasalon cosmetics and freying rens released its -- fragrance released its earnings reports milliseconds after 4:00p.m.. that fell short. high frequency trading computers sold 14,000 sells of the stock, and 121 each, totally $1.6 million worth of stock. at 4:00p.m. not quite 1 second, the stock closed at $118 a share. losing $3 in less than a second. in that rapid sell off of stock within the one second after 4:00p.m. analysts estimated high frequency traders could have pocketed as much as $28,000, a feat only they could have pulled off, and all perfectly legal. high frequency traders and their complex computer formulas, operating near the speed of light turned what happened on the floor of new york stock exchange into little more than

theatre. look behind the curt in and you'll see why humans can't compete. >> the only participants in the time frame are the machines, humans are able to receive information to act on it. in that time frame. >> nanex's founder is a critic of high frequency trading and has watched it evolve. it's grown to hundreds of firms spread across the globe to new york, chicago, london and hong kong. it is so fast it's not measured in seconds, it's measured in milliseconds, it's one second chopped off into 1,000 parts. it takes 300 milliseconds to blink. 200 milliseconds to recognise a word. a high free sequency trader, it takes 1 millisecond. these days, if you are not trading at those speeds, you are toast.

it's not just speed. high frequency traders have their own special sauce. that is a complicated formula called a black box algorithm. costing anywhere from half a million to 10 million. they scour the market for cues, including what stocks others want to by or sell, prices moving higher or lower, changes in changing volume. they react to key words. twitter feeds and news reports in the blink of an eye. tens of thousands of times a day, generating profits of a fraction of a penny per trade. that all adds up. >> if you have an algorithmic code that can do that, literally hundreds of thousands of millions of times it prints money. high frequency firms, some bragging that they never had a losing day. >> high frequency trading helped

to set prices from everything that traded - stocks, bonds, futures, commodities, everything from apple stock to the price of gas, orange juice to the price of mortages, and some think there's nothing to worry about, like the former chief's economist. >> are the markets broken? i would say not. i can think back 150 years ago when the telegraph was invented. you had many of the same issues arrive. same thing when computers or the telephone came to the trading area. for mum and pop, focussing on the long term, being an investor, ultimately you are okay. >> others call for more regulation, saying high frequency traders have an unfair advantage. regulators are investigating relationship with exchanges. the outgoing commissioner calls traitors who use high frequency

trading programs cheetahs. he worries that they and high powered technology are running wild in the mark. >> technology is great. we love technology, i don't love technology out of markets. currently there's no rules or regulations. zero, nada. i'm concerned that the high frequency cheatas may be rorting the market. >> regulators say high frequency trading tributed to a crash in 2010. where the dow jones fell a shocking 1,000 points in five minutes, erasing a trillion in market value only to recover a few minutes later. on april 23rd, 2013, high frequency raiding algorithms reacted to a hacked associated press account which said president obama was injured in an explosion, the false report fuelled a flash crash that

erased $121 million of value from the s&p 500 before it rebounded. the real fear is next time the market will not recover from a flash crash. and hundreds of millions will be wiped out in a matter of minutes. >> of course not everyone agrees that high free immensy trading represents a threat to market stability. the author of high frequency trading, a popular guide to strategies and feeding systems - she told ali velshi that aggressive high frequency trading is balanced and good for the market. >> thank you for being with us. >> you heard my - almost an indictment of some of the parts of high frequency trading. i take it you take a high frequency position. >> i love the analogy.

there's so much change, the reason is data. the records were not kept accurate enough over the past decades, where there is climate change happening now or not. this is not dissimilar in all. if you look at 20 years ago, the only quotes available to investors were daily open high low and closing prices printed in the newspapers the following day. now we are inundated with data. every inventor could track online. our firm of analysis on flash crashes, and whether - using whatever data is available, the flash crashes today, are not more frequent than there were 20, 30, 40 years ago. >> i used to work on the floor of the new york stock exchange as a reporter, back in the days when they had three floors, and

there was an open outcry, the fact is when a stock started to go down, some human had to sell or buy the stock from another human. you didn't have market wide flash crashes... >> you did. >>..there was intervention, the ability, more detail than viewers need, but specialists whose responsibility it was to buy up certain stocks. there were not days where the market would be down 3, 4, 5, 6, 7%, and bounce back in the course of a day and no one knew what happened. >> there were, they were not reported. >> i was there on the floor, i never witnessed such a things. on the floor you witnessed the trading. you never saw things go green to red and suddenly not come back. . >> that is the thing with flash crashes, they are in today, they

go down, and they come back. if you look at the famous flash crash of may 2010. investors who stuck it out and didn't panic, they thought they better, at the end of the day, the prices went up. we measure prices. all going back 40 years, and compare the low to the open on the day. you would be surprised how many there are in the security. the reason you never see something exceeding 5% is all the exchanges have a built in system where if the price drops more than 5%. the system halts trading. >>was 10%, it's down to 7, 13 and 20. you can get to 7% before anyone does anything. >> yes, yes. but the bottom line, the flash

crashes were common going back 10-20 years ago. there was one period in the history of the u.s. financial markets, and it's roughly from the 1990s, to 1995, when there was an unusually low number of flash crashes. so there were few flash crashes over that period of time. if you look back through the '80s, '70s, and late '90s, and 2000, the numbers is high. >> how would you respond to critics that say that the big swings that we looked at. let's go beyond flash crashes. big market swings that are, generally speaking, sentiment driven are amplified. there's a situation that sentiment decided to drive the market down in the case of the dow, 1,000 points, and high frequency trading, because it looks for signals and sentiments, bushes it down. gives it greater velocity.

>> in most crashes, the traders follow institutional leads. so the institutions are the ones. so institutions are pensions funds, hedge funds and other large players in the market who don't take short-term position, they take longer term views. they initiate the pressure in the flash crashes, and high frequency traders respond to the kind of pressures in the market and continue to trade around it. >> you think this is what happened in the major moves that we saw in august. >> yes. >> it was triggered by institutional sellers, high frequency traders followed that. >> yes, that's our conclusion. again, the power of computerized traders is not in the speed. it's in data analysis. so you are right. the people blink or forget blinking. people can capture only 24

frames per second. and this is what you see. >> this goes faster. >> thank you for joining us. managing director at able alpha trading, she's an author the keys to success in the stock market are speed and location. for a first-hand look, we didn't have to go to wall street, our team went to new jersey. that's next.

right now in the financial world, it's the equivalent of an arms race, for high frequency traders, fibre optic cable is the cable of joys. you won't be surprised at how much traders spend on cable to shave off a few seconds off the

trading time. as ali velshi reported in 2014, high frequency traders are ready to pay big bucks for the privilege of being first in line. >> reporter: back in the 1920s, you'd have to wait about 20 minutes at a ticker tape to see the latest information about a stock. now trading information is almost instantaneous, travelling at the speed of light. it's so fast only the fastest computers can keep up with the pace. this is the trading floor of the new york stock exchange. it's almost completely an anachronism. humans are almost not needed. the vast majority are traded here. to understand how it works, you need to go across the hudson river though new jersey, now the markets are almost completely computerized. networks and server farms at five sites in new jersey are where most trades actually

happen. i'm in new jersey, about 30 miles from manhattan. this high security building is the new york stock exchanges's data center. it's here, not on the floor of the new york stock exchange, where almost all the trades take place. if you are a high speed trader, looking for a fraction of a second advantage, you have to be close to the server farm as you can be. that's co-location. you pay to have your server in that building. and only the biggest players can do that. that shorter distance matters. even if it's only a few feet. according to one estimate. having a connection that is one mill second faster than the competition could mean a 100 million a year for a high frequency trader. critics charge that the co-location access is a former front running, buying of stock before you do, and selling it to you for a higher price. and it's drawing the scrutiny of state and federal regulators,

concerned that it might provide advantages not available to regular investors. >> high frequency trading depends on speed to be successful. to participate in that environment, you have to get direct feeds from the exchanges. one will cost you 60,000 a month. so, really, to get the - to participate at that level, there's few that can. the need for speed doesn't end with co-location. high frequency traders are willing to pay for any microsecond advantage they can get. even one between two different exchanges. right now, for example, there's a fibre optic cable linking the new york stock exchange servers in new jersey, and nasdaq servers in qatar abbing new jersey. a higher speed network will link the exchanges, the laser looks like wally, and uses technology

originally developed for the department of defense. >> when our network goes live, it will have the time it takes to move price information between two locations, in imperial terms it will take about 780 microsecond round trip time, and bring it to 350 micro seconds. >> to put that in perspective. that's a 0.00036 of a second savings. imperceptible to you and me, potentially worth millions to a high frequency trader. this quest to trim a fraction of a second extends to the time it takes stock information to travel between london and new york. there are 12 fibre optic cables crossing the atlantic, the last engineered over a decade ago. a new route is plauded, following a straighter line.

>> we managed to shave off by beating it, straighter than the existing cable, about 500km off that route, off the cable. that makes it about five milliseconds faster than the fastest cable today. building a fibre optic table is not cheap. the cost and the 5 mill second advantage - about 200 million. >> what is fascinating about the cable is the information is traversing through this little fibre here. of all the cable, the relevant par are the six. fibres peers that you are looking at here. everything else is to protect this. and carry power to amplify the system. it's fascinating to thing there's 5,000 linking the two. >> it doesn't end there, there's talk of taking a laser network across the atlantic using air

ships. >> it's loosely coined as an air bridge, it's blimps, platforms, geostationary at 70,000, talking to one another over the same technology, connecting new york to london. it would do it in 30 milliseconds. the price tag $500 million. >> they are the minds behind the machines, and high featured trading. meat the keecks out of college, building black boxes and laughing all the way to the bank.

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if you think a degree in science engineering or maths is in the sexy, think again, the skills are cool by wall street firms that design complex high speeding algorithms, formulas generating profits and controversy. the people that write them are called quantitative analysts or quants. ass ali velshi reported, some are trading quant traders by offering degrees. to under this phenomena, let's go back to 1984, and a cold

movie called revenge of the nerds. [ chanting ] >> in revenge. nerds, maths and science students are depicted as gooeds who are tormented by the jocks. but even back then, the nerds understood the tremendous power of the computers which they could leverage to their benefit. >> gilbert. >> that was 30 years ago. >> the matter of high frequency is simply a matter of timing. >> today many maths, science and physics students are using their formidable skills to join the ranks of the financial industry. the stevens institute of technology has a magnificent view of technology. here is the thing, don't be fooled by the setting. what goes on at stevens, could shape many of the fortunes

crossing the hudson river. stephen's institute of technology is one of about 100 colleges and universities in the united states. that offered degrees in financial engineering. the classes have totals like applied differential equations and extreme problems for elip tick programmes. at the height of the programme is black boxes that can generate millions in profits for high-frequency trading firms. >> the high frequency are in demand. students might go on their own, with the spirit of entrepreneurship and create health funds. ask mitch helperly, one of 97 master students. we design our own black box. highly successful is an atm in the sense that it's always generating money.

and you don't necessarily have to be there, which is the best part, so your bank account increases. >> across the hudson river, new york university has a more prestigious programme, but it's not at the stern school of business, rather it's next door at the n.y.u. institute of mathematical sciences. >> this is a competitive programme to get into. this year, we have roughly 900 applications for a class size of about 40 students. so we often jokingly say it's more difficult to get into the programme than it is to get into harvard. >> the professor was in the quantitative strategies group before coming to n.y.u., and he says there's no substitute to being in the financial capital of the united states. >> if you want to learn quantitative finance, and you want to learn from the best, this is the place to be.

>> these students agree, and are willing to spend $50,000 in tuition over 18 months to study financial engineering. why? maybe because graduates have gone on to work at credit suisse, morgan stanley and goldman sachs, and earn a million base salary of $85,000, the first year out of school. more impressively, a few years down the line with a little experience down their belt, a quantity may command a salary of a quarter of a million with a bonus of $500,000 or more. >> the reward could be a sense of achievement. that you have done something great. and the money that comes about it. if you did something great, it can be measured. i can disintegrate. >> with a $100% placement rate for students in the maths and finance programme, it seems like the opportunities on wall street

are limitless for students with a degree in financial engineering. and in the end it may be the nerds who have the last laugh. >> how faster we going. >> i have cruise control set at 35 and that is our show for today. i'm david shuster, in for ali velshi. thank you for joining us, have a great night everybody. [ ♪ music ] good evening, welcome to "america tonight", i'm lisa fletcher, in for glen, ws