Higher frequency trading

Higher frequency trading (HFT) became a powerful breakthrough. It managed to impact radically all principles of conducting exchange bidding, destroyed many stereotypes.

What is high frequency trading?

HFT is a form of algorithmic bidding, in which modern equipment and tactics are used for quick bidding. It uses special procedures, where computers purchase and sell positions right at a split second.

HFtrading agents open and close short-term positions with large volumes in order to get a small profit on each transaction. 

One of the incentives for the development of HFT technology was the development of front running strategy, in which various delays in the transfer of orders for transactions give an advantage to those ones, who have earlier access to information.

 

 

HFT history

HFT began in the late 1990s, after the SEC authorized the operation of electronic bidding platforms in 1998. At first, HF transactions were conducted on a time scale of several seconds, but by 2010 this time decreased to milliseconds.

 

HFT schemes

  • Electronic Liquidity Provision: a trader provides liquidity and makes a profit at the expense of Spread. Additionally, for providing liquidity, trading agents can receive payments from stock exchanges or ECN or save on transactional payments due to discounts.
  • Statistical arbitrage: a trader tries to identify correlations between different securities and benefit from the imbalances between them.
  • Liquidity detection: HF trading agents try to detect large orders or hidden orders, constantly sending small orders and tracking the time of their execution.
  • Latency arbitrage: a trader gains an advantage due to initial access to market information.

 

HTF technical aspect

For trading, an investor must enter into an agreement with a broker who provides access to bidding. Such companies also develop their own high frequency trading software, in which customer requests are processed before they are sent to the stock exchange core. However, when everything can be solved in a few a split second, the “user-brokerage system-exchange” scheme is not for everyone.

To remove the unnecessary link in the form of a broker system, a DMA (direct market access)technology was created for direct link to the exchange. It bypasses a broker`s infrastructure.

Direct link to the exchange allows you to bring the trading system closer to the core of the exchange, but you can get even greater speed gains by placing it physically closer to this end point. Exchanges provide equipment collocation service in their data centers. In this case, the bidding system can be run on a server that is actually in the same rack with the servers of the core.

The robot can be placed both on a separate server that can be rack mounted in a data center (Collocation),and on a virtual machine (Hosting),which in turn runs along with the virtual clients of other clients on the server also installed in the data center, next to exchange servers. 

Placing in the Collocation allows you to connect bidding robots directly to the stock exchange core. In this area, it is also available to obtain market data (Market Data) using the FAST protocol.

It costs much money. The use of programmable hardware allows you to get a serious gain in processing speed and reduce delays.

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