Key Takeaways
- Algorithms can read and react to news in milliseconds—humans cannot compete on speed
- Retail traders experience 10-100 millisecond latency; HFT systems operate in microseconds
- By the time you see news, the initial move has likely already happened
Trading the News
Client Question: "If I react fast to earnings reports, can't I make money before everyone else?"
News-based day trading tries to profit from market reactions to earnings reports, economic data, FDA decisions, or other announcements. The appeal is obvious—if you know something first, you should be able to profit.
The Speed Hierarchy
The challenge is that markets have evolved to process information faster than humans can read:
| Participant | Latency | Context |
|---|---|---|
| HFT firms (co-located) | <1 millisecond | Servers in exchange data centers |
| HFT systems (processing) | 0.01 microseconds | Specialized hardware (FPGA units) |
| Professional traders | 1-10 milliseconds | Direct market access |
| Retail traders | 10-100 milliseconds | Standard brokerage platforms |
The gap in perspective: A retail trader's 100-millisecond delay is 10,000 times slower than an HFT system operating at 0.01 microseconds.
The Cost of Speed
Why can't retail traders access faster systems?
| Infrastructure | Cost |
|---|---|
| Premium data feeds | $5,000-$50,000+ per month |
| High-performance servers | $20,000+ |
| Colocation services | $8,000+ |
| Direct market access | Additional fees |
This infrastructure is designed for institutional traders, not individuals.
What Happens When News Breaks
Here's the timeline when major news is released:
| Time After Release | What Happens |
|---|---|
| 0-1 millisecond | Algorithms parse headline keywords |
| 1-10 milliseconds | HFT systems execute initial trades |
| 10-100 milliseconds | Market prices adjust to new information |
| 100-1000 milliseconds | Retail orders begin executing |
| 1-60 seconds | Retail traders see the news and decide to act |
By the time a human reads a headline, understands it, and places an order, the price has already moved.
The Interpretation Problem
Even if you could read news instantly, you'd face another challenge: knowing how the market will react.
| News Event | Possible Interpretations |
|---|---|
| Company beats earnings | Bullish—but was it already priced in? |
| Company beats earnings | Could be bearish if forward guidance disappoints |
| Fed raises rates | Could be bullish (fighting inflation) or bearish (slowing economy) |
| Layoff announcement | Could be bullish (cost cutting) or bearish (struggling business) |
Professional traders often have models and context that help them interpret news faster and more accurately.
Real-World Impact
Research shows the speed disadvantage has measurable costs:
| Speed Difference | Impact |
|---|---|
| 500 millisecond delay in volatile markets | Significant price slippage |
| 1 millisecond improvement (institutional) | 0.1% better trade prices |
| 1 second delay at institutional scale | Up to $100,000 annual losses |
What About "Unexpected" News?
Some clients believe they can profit from truly unexpected news:
| Scenario | Reality |
|---|---|
| Surprise FDA approval | Algorithms still process it first |
| Unexpected merger announcement | Pre-market or after-hours moves often capture most of the gain |
| Earnings surprise | Much is priced in from options markets and institutional positioning |
Professional Framing
When clients want to trade news:
"The challenge with news trading is speed. Algorithms can read headlines and execute trades in under a millisecond. A typical retail trader's platform has latency of 10-100 milliseconds—by which time the initial move has often already happened. There's also the interpretation challenge: even if you see news first, knowing how the market will react isn't straightforward. 'Good' news can lead to sell-offs if it was already expected, and 'bad' news can trigger rallies if it's less bad than feared."
What Retail Traders Can Do
Research suggests retail traders should:
| Approach | Why |
|---|---|
| Avoid timeframes shorter than 5-minute charts | Reduces competition with HFT |
| Focus on longer-term trends | Patterns are easier to identify |
| Accept that you won't be first | Build strategies that don't require speed |
A retail trader sees breaking news on their platform and immediately places a buy order. Approximately how much slower is their execution compared to an HFT system co-located at the exchange?
Why might a company that "beats" earnings expectations still see its stock price fall?