High Frequency Trading is relatively comprehensive and in depth regarding how stock market trading is conducted. According to Investopedia, High Frequency Trading (HFT) is a program platform which uses powerful computers to transact large numbers of orders at fractions of a second. Technology and math are the two main components that are involved in HFT. In regard to technology the most important components include proximity, hardware and high efficiency algorithms. A transaction can be completed faster due to the location of the firm or trader relative to the exchange. The hardware that composes most of the computers are called FPGA’s which are used since they are able to convert simple logic (trades) relatively quickly. Institutions have to maintain these computers since they can catch fire at any point as they are processing so much information. Algorithm efficiency is also an important factor. Computers need to have these algorithms installed only with a few key functions because memory can deter the time it takes for a trade. Regarding all the technology involved, it costs thousands and thousands of dollars to pay for all the technology that is involved with the trades. I feel it’s a use of technology that gives advantages to institutions that have millions of dollars to spare just to make millions upon that. An average daily trader will the receive the information much later (in terms of nanoseconds, milliseconds, and seconds) than professionals. IT gives these institutions and individuals who can use these computers an advantage in the market without giving day traders this advantage. Author of Broken Marketsstated, “By the time an ordinary investor sees the quote, it’s like looking at a star that burned out 50,000 years ago.” Institutions are itching to find efficient and faster solutions to shave off milliseconds on trades just to make a few extra pennies on the dollar. They are willing to spends thousands of dollars to improve their connectivity by purchasing better software that reduces their latency so they will always be the first. By just improving their trades by one millisecond they can produce an annual profit not revenue of 100 million dollars. During an average day, to an individual, seconds really don’t matter during our professional career, unless we are waiting for the clock to tell us it’s time to go home. In financial institutions traders and managers care tremendously about those milliseconds and nanoseconds. During these milliseconds, it’s not just one trade that’s occurring its hundreds.
These trades have the opportunity to make a company a lot of money.
Ethics is another question that is regarded towards high frequency traders. It may seem a smart investment from an outsider as a way to branch into the industry. People tend to ignore the underlying issues with high frequency trading, like how unfair it is to the average person looking to trade. This allows for these institutions to move the market and fluctuate the daily volumes in any direction they would prefer.
Here is a video detailing High Frequency Trading:
Sources: Chen, James. “High-Frequency Trading - HFT.” Investopedia, Investopedia, 13 Dec. 2018, www.investopedia.com/terms/h/high-frequency-trading.asp.
Hall, Mitchell. “Inside Wall Street's High-Frequency Trading Technology Arms Race.” PCMAG, PCMAG.COM, 25 Sept. 2013, www.pcmag.com/article2/0,2817,2424495,00.asp.
“Math vs. Speed: The Secrets of High Frequency Trading.” Inc.com, Inc., 30 May 2017, www.inc.com/quora/math-vs-speed-the-secrets-of-high-frequency-trading.html.
“The Technology Stack for Successful High-Frequency Traders.” HPCwire, www.hpcwire.com/solution_content/hpe/financial-services/technology-stack-successful-high-frequency-traders/.
“High Frequency Trading Explained.” Financial Times, Financial Times, 1 Aug. 2017, www.ft.com/video/6e7cd4df-18c2-440a-8b20-01ed789d556d.
No comments:
Post a Comment