First meeting with high frequency trading

Have you ever heard the term “high frequency trading”?

If you work for an American financial institution or if you live in the US, probably you have heard it much more than us European guys. Euro markets are just getting used to this phenomenon: I could say that until the May 6, 2010 “flash crash” on the E-mini S&P 500 futures contract hardly anybody in Europe knew this term, and even today it's such a new practice that only specialized people working close to the “HFTs' world” know exactly what they do.

This section's aim (let's call it its mission impossible) is to try to shed some light on the phenomenon. Because we are striving for innovation, we think high frequency trading is a practice so influent (for its massive presence in the markets and its effects on trading strategies), controversial (you can probably find all ranges of judgments on HFT, from pure love to great hostility), and difficult to figure out that deserves to be put in light.

To make an example, the European brand new European regulation “MIFID II” proposal released in October last year, would like to introduce a number of provisions aiming at comprehensively define, authorize and regulate high frequency trading – in their own words, “algorithmic trading or high frequency can lend itself to certain forms of abusive behavior if misused” (European Commission, 2011. Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on markets in financial instruments repealing Directive 2004/39/EC of the European Parliament and of the Council). You see? The impact of high frequency trading in the markets still needs to be assessed. Are these rules going to be effective? If you live it to me, hard to say.

Here are some of the relevant HFT characteristics:

• they generate a high number of orders…
• …many of them canceled soon after submission
• they employ highly-sophisticated computer programs
• usually their positions last seconds or minu
  
  tes
• they aim to reach maximum speed (the so-called low latency)…
• …through the use of co-location (placement of their servers into the exchanges' headquarters)
• they end the trading day with zero or low account positions
• and employ their internally developed strategies…
• …processing direct market data-feeds
• they are usually in form of firms with no clients, they trade their own capital and aim to make money

So, let's discuss everything here in the next ones. Wish you a nice evening.

Originally posted at www.77sigmatrading.com