High frequency trading technology has many formats and variations. Despite the differences, high frequency trading (“HFT”) platforms are remarkably similar. Certain core functionality is mandatory for proper performance of any high frequency trading campaign. All HFT technologies share a trio of common characteristics:
Speed
Incomprehensible speed is the heart of any HFT trading technological suite. Gleaning and analyzing pertinent market data, order coordination, and their positioning into the proper trading arena within one-thousandth of a second demands incredible technological acumen.
Likewise, the simultaneous management of thousands of exchanges within appropriate operational limits is crucial. Indeed, this oversight is so imperative that if pre-trade events take too long, trade cancellation is probable. This is necessary to avoid incurring exchange fees for aborted trades.
Integrity
Regardless of HFT’s relative novelty, the essence of securities trading has remained constant. Accurate assessment of all associated economic risks entailed in every trade must still be performed. Scrupulous adherence to all legal, regulatory, and professional ethics parameters must continue.
Trades must be also be capable of reconstruction in event of subsequent audit. Enhanced precision time protocol (“PTP”) for HFT networks is ever evolving to facilitate better documentation of time-stamping and trade processing histories. HFT infrastructural integrity is equally important as speed.
Security
No matter what form it takes, security is an indispensable feature of HFT technology. Security is the first line of defense against unauthorized third-party system access. Also, algorithmic components must be periodically tested to avoid “flash crashes.” Inerrant quantitative and timing are required to ensure that test results are valid.
Electronic market making (“EMM”) is a technological spinoff of high frequency trading technology. EMM is a revolutionary high-tech methodology that employs software to identify ultra-short price disparities. Trades are subsequently constructed around anticipation of subsequent price convergence.
For instance, traders could design software to predict imminent interest rate spreads between 10 and 20-year US Treasury bonds. Millions of trades can be executed each day based upon likely trends identified thereby. Such EMM investment strategies are contingent upon incredible computational capability and extremely rapid connectivity for long-term success, however.
Here to Stay
High frequency trading technology is the wave of the future; the future is now. Substantial savings and enhanced trading efficiency are two features that guarantee the continued popularity and pervasive practice of HFT. The handwriting is written all over the monolithic walls of US trading brokerages and securities exchanges. Acceptance is well-advised for all HFT critics and debunkers.
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