What is High Frequency Trading? \u00c2\u00a0In the most basic sense, it’s trading done completely by computers over networks with humans babysitting them. \u00c2\u00a0Maybe a little history would help?<\/p>\n
In the beginning, there was the marketplace. \u00c2\u00a0And it was… primitive. \u00c2\u00a0Multiple places in Europe started different kinds of exchanges to trade things. \u00c2\u00a0Shares in companies, government securities, tulip futures (famously), etc. \u00c2\u00a0For hundreds of years, it was open outcry at exchanges. \u00c2\u00a0People would literally huddle in groups for each thing being traded and make deals in person. \u00c2\u00a0They would write down what happened for the deal on pieces of paper and reconcile at the end of trading. \u00c2\u00a0Phone lines elsewhere on the floor were added, runners would go to their brokers after getting a call from someone else who saw the price on the ticket, etc. \u00c2\u00a0NASDAQ came around and was electronic. \u00c2\u00a0It revolutionized the industry. \u00c2\u00a0Other exchanges slowly came around until now nearly everything is electronic.<\/p>\n
Computers changed quite a few things. \u00c2\u00a0Speed and reliability of execution were improved by an incredible degree. \u00c2\u00a0Costs were lowered. \u00c2\u00a0Barriers to entry removed.<\/p>\n
Seats on the CME start at $750,000 for example link<\/a>. \u00c2\u00a0Nasdaq? \u00c2\u00a0$2000 application fee and montly fees for membership ($3500 or so). Link<\/a><\/p><\/blockquote>\n
Per trade fees are also lower than they used to be. \u00c2\u00a0Combined with networking advances, it’s the perfect recipe for high frequency trading.<\/p>\n
Enabling factors<\/h3>\n
There are a few things that have to happen for this to work. \u00c2\u00a0A firm wanting to get involved in high frequency trading needs kind of a perfect storm to make it in the market.<\/p>\n
Fast data feeds from one or more markets.<\/p>\n
The feed is a stream of data coming from the exchange listing what is happening. \u00c2\u00a0People are bidding on products, people are offering products for sale, and sales are occuring. \u00c2\u00a0The feed tells you all of them.<\/p><\/blockquote>\n
Fast connections back to the matching engine.<\/p>\n
The matching engine is what it sounds like. \u00c2\u00a0It matches up the buyer with the seller for a given product at a given price and sends that data back via the feed<\/p><\/blockquote>\n
Computer power to actually figure out if there’s a profitable trade to be made.<\/p>\n
Companies usually locate their servers as close as physically possible to one or more exchanges. \u00c2\u00a0The datacenters themselves are amazing.<\/p><\/blockquote>\n
Cheap trading.<\/p>\n
(talked about more later).<\/p><\/blockquote>\n
So this all means?<\/h3>\n
Computers take in the feed, which is just what is going on in the market, and decide to make trades. \u00c2\u00a0It’s fast. \u00c2\u00a0How fast? \u00c2\u00a0Less than 200 microseconds to make a decision and send it back out is completely reasonable. \u00c2\u00a0Two hundred millionths of a second. \u00c2\u00a0And it has to do a lot of other things. \u00c2\u00a0If you are long (own) too many, you want to make it slightly less likely you’ll buy so you don’t end up with too many at the end of the day. \u00c2\u00a0If you’re short(have sold more than you have), you have to track all of that. \u00c2\u00a0High frequency trading is, quite simply, trading that’s done by computers, and only incidentally are humans involved.<\/p>\n
We (the people) think of the strategies, turn them into parameters the computers can understand, test them, and then let the computers run them with someone watching. \u00c2\u00a0Usually, someone spots or thinks they spot some advantageous idea and goes from there. \u00c2\u00a0Some people will write it into the programming itself – meaning that the program that does the trading itself is re-written to account for the new idea. \u00c2\u00a0Others will let the program modify itself – the people thinking up the ideas will enter programming language-like-code that then gets run by the trading program.<\/p>\n
The rest of the posts will be more about specific areas I thought were interesting when I was there – or areas I was involved in a lot.<\/p>\n","protected":false},"excerpt":{"rendered":"
What is High Frequency Trading? \u00c2\u00a0In the most basic sense, it’s trading done completely by computers over networks with humans babysitting them. \u00c2\u00a0Maybe a little history would help? Trading, a super short history In the beginning, there was the marketplace. \u00c2\u00a0And it was… primitive. \u00c2\u00a0Multiple places in Europe started different kinds of exchanges to trade […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[22],"tags":[34],"_links":{"self":[{"href":"http:\/\/www.imaginarybillboards.com\/index.php?rest_route=\/wp\/v2\/posts\/104"}],"collection":[{"href":"http:\/\/www.imaginarybillboards.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.imaginarybillboards.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.imaginarybillboards.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.imaginarybillboards.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=104"}],"version-history":[{"count":6,"href":"http:\/\/www.imaginarybillboards.com\/index.php?rest_route=\/wp\/v2\/posts\/104\/revisions"}],"predecessor-version":[{"id":132,"href":"http:\/\/www.imaginarybillboards.com\/index.php?rest_route=\/wp\/v2\/posts\/104\/revisions\/132"}],"wp:attachment":[{"href":"http:\/\/www.imaginarybillboards.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=104"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.imaginarybillboards.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=104"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.imaginarybillboards.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=104"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}