By CHARLES DUHIGG


IT IS THE hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading - and it is suddenly one of the most talked-about forces in the markets.

Powerful computers enable highfrequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. Highfrequency trading is one answer. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The United States Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.” In 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a computer and an idea.

But as new marketplaces have emerged, powerful algorithms execute millions of orders a second while scanning dozens of marketplaces. They can spot trends before other investors can blink.

Loopholes in market rules also give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits before anyone even knows they were there.

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders - typically a quarter of a cent per share. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”

To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots.

It was July 15, and Intel, the computer chip giant, reported robust earnings the night before. Some investors set out to buy shares in the semiconductor company Broadcom. The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would risk driving up Broadcom’s price. So they divided their orders, hoping to cover their tracks. One second after the market opened, shares of Broadcom started at $26.20.

The slower traders began issuing buy orders, but some of those were most likely routed to a collection of high-frequency traders for just 30 milliseconds. While markets are supposed to show orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, highfrequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers determined that some investors’ upper limit was $26.40. The price shot to $26.39.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

Multiply such trades across thousands of stocks a day, and the profits are substantial.

“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.”