High frequency trading
The so-called high – frequency trading is a basic form of trading in stocks and other securities in the financial market, which is carried out through the use of special algorithmic formulas and advanced equipment . It also implies the use of certain trading strategies in which PCs instantly acquire and implement positions. Some fractions of a second are spent on these tasks. According to experts and analysts, in 2010, high-frequency trading at the maximum peak reached 76% of the total volume of all transactions that were carried out in the United States. However, in 2013, this figure dropped to 50%.
When buying and selling securities, there are always intermediaries who receive their commissions. Currently, due to the rapid growth of markets and the rapid development of technology, the percentage of these fees has become much smaller. However, the commission still exists. These funds are relied upon to intermediaries who provide certain guarantees to sellers and buyers.
However, today there are mediators of the new formation. They are not interested in exchanges or banks. They focus all their attention on the so-called hedge funds. It is there that these intermediaries trade at fast speeds. That is why they are called high-frequency traders. They use computer algorithms (by and large, robots). With their help, high-frequency traders perform transactions in the financial markets.
If we consider the work of such traders in a primitive way, then they take money from the rich and leave them. So, such players of the market can be called bad guys. If you believe the assurances of numerous retail and institutional investors, then every year due to high-frequency trading, they are ruined in the amount of up to $ 2 billion.
However, sometimes high-frequency traders are unreasonably accused of frauds to which they have nothing to do. So, they were suspected of the recent unstable situation in the markets. Then one of the stock exchanges canceled its own IPO when a massive computer crash occurred. He provoked the uncontrolled trade in the securities belonging to her.
At the same time, many critics believe that those traders who use the “low latency” method and regularly give money to ensure that their servers are located close to the exchange systems have a head start over other market players. After all, in this way they are given more rapid access to financial markets.
But data transfer asymmetry is not a new phenomenon. The relevant specialists, market makers of over-the-counter markets and traders were always received data earlier than others. At the end of the 20th century. the so-called “SOES-bandits” were ahead of market makers through the use of Nasdaq execution technology. She helped them place orders until other market players updated their quotes.
The main objectives of the markets have always been to increase the speed of data transmission and the execution of orders. At the same time, the existing market infrastructure represents only a reasonable development of the trend for the long term.
How is everything arranged?
Algorithmic trading is a profit-making mechanism that is based on quick deals. This method of trading can be understood only in one way. This requires to study the rules of exchange orders. First, the broker receives an order from the trader. To do this, use the terminal. Then the applications are in the “glass”. There the prices for the purchase and sale are compared. At the moment when the allowable range is reached, the transaction is carried out.
In theory, each of the bidders should see absolutely all bids. For these purposes, OPRA was created. In this case we are talking about the international computer protocol of exchange feeds. There are also FIX and FAST, they are designed for terminals and monitor individual streams. In addition to MetaTrader, other platforms are equipped with this technology. For example, the QUIK terminal. It was created for trading stocks of the Russian Federation.
In order to outrun other market participants in high-frequency trading, traders are trying to optimize the flow of placing, as well as selling trading orders in all periods. This also applies to communication channels and server capacity locations.
All major exchanges and trading platforms are literally teeming with primary providers or sources of information. They have computer capacities that they are willing to share for a rather impressive amount of money. Also, market participants who apply to them may use additional services. For example, this is hiding customer requests in the stock exchange, other useful options.
Algorithms for high frequency trading
Nowadays, high-frequency traders use:
- Electronic market maker. That is, a liquidity trader receives income using a spread. This is the difference between the cost of acquisition and sale. Also, traders can take advantage of the opportunity to receive payments from exchanges or ECN.
- Statistical arbitration. In this case, the trader detects correlations that arise between various offers for stocks and bonds and derives income from fluctuations in value. In this case, arbitration can be performed both by exchanges of different states, and exchanges of one particular state. There may also be arbitration between the stock and the instrument that is derived from it.
- Identify liquidity. The principle of this strategy is that high-frequency traders detect large orders or hidden orders. In particular, they can generate special robots. They regularly send small orders to the market and follow the deadline for their implementation.
- Arbitrage delays. By gaining faster access to market data, the high-frequency trader gains time. For example, he can use a direct connection to one of the trading platforms and place the server closer to the exchange. This strategy is popular in the United States.