Market Overview

High Frequency Trading is an Arms War!

The high frequency trading industry is engaged in an arms war. Algorithmic, low-latency trading now accounts for roughly 70% of the volume in U.S. equity markets. Basically, the robots are in control, and they are fighting for fractions of pennies, but doing it millions of times a day.

The firms that control this lucrative industry range from private, closely held firms such as Chicago's GETCO, to major Wall Street banks like Goldman Sachs (NYSE: GS) and secretive hedge funds such as Renaissance Technologies. While the rewards can be huge, it is an ever evolving game where speed is everything. If firms aren't constantly upgrading their technology, along with their algorithmic strategies, they will soon become someone else's lunch.

One method that many high frequency traders are employing to cut down on latency is co-locating their servers at the different exchanges, which rent them space for big bucks. Sang Lee, who is a managing partner at Aite Group, told advancedtrading.com that "With automated trading, the black-box traders develop strategies and put them into a black box, and they host it in data centers operated by market centers such as Direct Edge, Nasdaq or Arca. A key element of what they're going to do is get as close as possible to the venue. Firms are willing to pay a premium to get that slot."

The firms are able to shave milliseconds off their order execution through co-location. This might not sound like much, but it is everything in today's high-frequency trading arena. According to Adam Afshar, who is the president of HFT firm Hyde Park Global, every millisecond counts. He told advancedtrading.com, "By colocating in New York, we are able to take 21 milliseconds off our trades. In the past 21 milliseconds was a trivial matter. Now it's a pivotal matter."

As a result of the demand for co-location and other low-latency technology, an entire industry has sprouted up. Many of these new firms have opened up data centers near major financial exchanges around the world to better help serve their clients. While business is still booming, the industry has created quite an uproar from market participants who believe that HFT has an unfair advantage and also exacerbates volatility. Despite the recent controversy, do not expect for these robot traders, and the companies that serve them, to go away anytime soon.

Posted-In: co-location GetcoNews Hedge Funds Global Economics Tech General

 

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