High Speed Trading

Goldman Sachs Group Inc., which called for reform of high-speed stock trading before Michael Lewis’s “Flash Boys” spurred an outcry last year, is diving back in.

The bank’s electronic equity-execution unit is hiring executives including Keith Casuccio from Morgan Stanley and investing in software, trading infrastructure and its dark pool, according to people with knowledge of the plan.

Goldman Sachs emerged last year as an early supporter of the U.S. stock platform created by IEX Group Inc., portrayed in Lewis’s book as an antidote to the perceived ills of the super-fast, multi-venue electronic trading in today’s market. Now, after few major changes in the way stocks are traded, the investment bank is seeking to execute faster, catching up with competitors and leveling the playing field for its clients.

Goldman Sachs is one of the world’s top equity-trading banks, climbing to No. 1 by revenue in the first quarter after ranking second in 2014, when it produced $6.74 billion. The latest push, which included hiring Raj Mahajan as head of equity electronic-execution services this year, shows it’s focused on establishing itself as one of the top players in automated trading in particular.

In March 2014, the bank’s president, Gary Cohn, wrote an op-ed in the Wall Street Journal calling for the industry and regulators to improve the market’s structure as risks were “amplified by the dramatic increase in the speed of execution and trading communications.”

Shutdown Weighed

Goldman Sachs said in a memo after the op-ed that markets would be well-served if IEX achieved “critical mass,” even if that meant reduced volume at its own dark pool, Sigma X. The firm’s focus had shifted away from the electronic business, with Greg Tusar, who had led the unit for Goldman Sachs, leaving in the first half of 2013.

Similar groups across Wall Street faced scrutiny because of concerns that their platforms were too opaque and that high-speed traders were siphoning off profits from everyday investors -- issues that have led to probes by New York’s attorney general, the Securities and Exchange Commission and Justice Department.

Goldman Sachs’s latest effort is an acknowledgment that clients still need the fastest means of execution possible, including through dark pools and high-speed strategies. And it shows the pressure the bank faces after rivals such as Morgan Stanley and Credit Suisse Group AG invested in their platforms.

Adding Specialists

Goldman Sachs plans to pitch its improved systems to customers by highlighting fill rates, the percentage of orders that are executed, according to one of the people, who asked not to be identified talking about internal strategy. Part of the focus will be on winning business from quantitative hedge funds that already are clients of other parts of the bank, such as the prime brokerage.

Casuccio, an executive director at Morgan Stanley, will join Goldman Sachs as a managing director reporting to Mahajan later this year, the person said. Tiffany Galvin, a spokeswoman for New York-based Goldman Sachs, declined to comment. Casuccio didn’t return a phone call to a listed number seeking comment.

Mahajan, the first partner-level hire in the bank’s equities group in more than a decade, was recruited in January from high-frequency trader Allston Trading to guide the overhaul.

The electronic group aims to add more people in coming months, specifically technology specialists, according to the person. Upgrading Sigma X also is on the agenda, said the person, who added that the company believes the group could achieve a double-digit growth rate if the changes are successful.

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James Chen, CMT, Chief Technical Strategist for City Index Group teaches high probability technical trading strategies that employ confluence principles for maximizing trade entries and exits.

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Some publications, white papers and research about high frequency trading.

High-Frequency Trading - Better Than its Reputation? ~ Deutsche Bank Research

High-frequency trading - Better than its reputation.pdf

High-Frequency Trading In The Foreign Exchange Market ~ Bank For International Settlements

High-frequency trading in the foreign exchange market.pdf

High-Frequency Trading - A White Paper ~ IRRC Institute / Stevens Institute Of Technology

HIGH-FREQUENCY TRADING - a white paper.rar

High-Frequency Trading: technology, business, Illegal practices, and more

High-frequency trading (HFT) firms use sophisticated computer programs to execute thousands of trades in a second. In fact, a second is slow by HFT standards: Traders often measure time by microseconds, or one-millionth of a second.

In the decade or so since this high-tech form of trading zoomed onto the Wall Street scene, it's generated plenty of controversy. Critics argue that high-frequency trading creates or perpetuates unfair advantages while proponents say that HFT provides much-needed liquidity, or the ability to quickly buy or sell a security, to the markets.

The technology
Technology is the driving force behind high-frequency trading. Key tech-related terms in the HFT world include:

• Algorithmic trading, algo-trading, or automated trading: High-frequency trading belongs to a larger category of trading known as algorithmic, electronic, or automated trading. In algorithmic trading, firms use computers programmed with specific algorithms -- sequences of steps -- to identify trading opportunities and execute orders..

• Low latency: In the context of high-frequency trading, latency refers to the amount of time it takes for information to reach a trader's computer, for him or her to place an order in response to that information, and for the order to be received by an exchange. Technology marketed as "low-latency" or "ultra low-latency" is what enables high-frequency traders to place their orders at unfathomably fast speeds.

• Co-location: In a largely digital world, sometimes physical proximity still matters. To reduce latency and to drive down the time it takes to execute a trade -- even by milliseconds -- high-frequency traders (among others) pay to place their computers in the same data centers as an exchange's computer servers, a practice known as co-location. To ensure that no trading firm's computer has an advantage over the other, some exchanges have mandated that the cords connecting various firms' computers to an exchange server be the same length. The SEC has generally requested comment on the practice of co-location, among other issues affecting equity market structure, but it noted that co-location fees must be filed publicly with the SEC and not unfairly discriminatory.

The business
Here are just a few of the terms that describe the day-to-day activities and strategies used by high-frequency trading firms.
It is important to note that these features of modern trading may not be inherently good or bad. Some of these practices may promote better functioning markets, while other practices (or even the same ones, in different circumstances) may cause harm. Much of the debate today aims to distinguish constructive trading practices from those that may impose unnecessary risk or extract unreasonable value from the marketplace.

• Market-making: In investing, market makers are firms that simultaneously make offers to buy (a "bid") and sell (an "ask") securities at specific prices, effectively providing liquidity to other market participants. Such firms seek to profit from the "bid-ask spread" of these securities -- the difference between the (lower) price at which they buy a security and the (higher) price at which they sell it. To encourage market-makers, many exchanges offer rebates or other benefits for their services, coupled with certain market responsibilities.The rebates they earn typically equal just a fraction of a penny per share, but since high-frequency traders buy or sell huge numbers of shares, those tiny rebates can add up to big bucks. Since 2000, the number of traditional market-makers -- firms that rely on humans rather than computer programs to make buy and sell offers -- has shrunk significantly, leaving the more automated firms to dominate the field.

• Dark pools: Stocks that are listed on a particular exchange do not need to actually trade on that exchange. In fact, much of modern trading takes place not on public exchanges but in so-called dark pools, private trading platforms, sometimes sponsored by major banks, in which buy and sell orders are matched anonymously and prices are'ot displayed publicly until after the trade is executed.Large investors, such as institutional investors, may choose to trade in dark pools to reduce the risk of their large orders influencing the markets in ways that could prove costly to them. Though some investors initially sought to trade in dark pools to avoid doing business with high-frequency trading firms, HFT firms ultimately emerged as major providers of liquidity in some private platforms. While dark pools may offer an alternative to public exchanges, they are dependent on the public exchanges to set the prices at which securities trade -- the "price discovery" process -- since they generally are prohibited from executing trades at prices that are inferior to the publicly set price.

• Pinging: To find large buy orders, high-frequency trading firms may place small sized "immediate-or-cancel" orders for a security to determine whether there's interest in buying or selling it in dark pools and other corners of the investing world largely invisible to the general public. As the Securities and Exchange Commission has noted, pinging can be part of a "normal liquidity search," but some have questioned the legality of pinging, at least in some circumstances.

• Statistical arbitrage: When a security's price is lower or higher than certain statistics indicate it should be traders can profit from such a discrepancy by, for instance, buying an undervalued stock and then later selling it when its price rises to its expected level. One form of statistical arbitrage is pairs trading, in which traders identify two stocks that typically move together -- that is, experience similar rises and falls in share price -- and then take long and short positions on those stocks if they suddenly begin moving in opposite directions.Traders can profit from pairs trading if the stocks ultimately return to similar price levels. High-frequency trading firms engaging in statistical arbitrage sometimes hold securities for very short periods of time -- often minutes or less -- before taking profits. In such cases, it's typically up to an HFT firm's algorithmic trading technology -- rather than a human trader -- to detect a statistical arbitrage opportunity and quickly act on it.

• Latency arbitrage: Latency arbitrage is a strategy through which high-frequency traders target differences between a stock's price on various trading platforms. For instance, if an HFT firm's algorithmic trading program detects that a stock's price has risen on one exchange, while remaining the same on another, the program can automatically buy the stock at its lower price at the second exchange while selling it at the higher price at the first. For high-frequency traders, the speed at which such trades occur is critical. Acting too slowly means a stock's price discrepancy between exchanges can disappear before a trader has a chance to profit from it.

Illegal practices

In recent years, the Securities and Exchange Commission (SEC), the Federal Bureau of Investigation, and other regulators have announced crackdowns on suspected wrongdoing by high-frequency traders. The potential offenses include:

• Front-running: Generally speaking, front-running refers to making a trade based on non-public advance knowledge of a large transaction. The SEC and FINRA have banned this practice. In the debate around HFT, some have used the term "front-running" to characterize a practice where HFT firms deploy algorithmic trading technology to detect large incoming orders for a security, and then automatically buy the security before the original large orders are completed. Almost immediately after they buy the securities, the HFT firms can then profit by selling the securities to the original investors at higher prices. While such conduct may not be unlawful if not based on material non-public information, there are questions about the value it provides and the extent to which it should be regulated.

• Spoofing: Spoofing is an illegal trading tactic that involves the manipulation of a security's price in order to profit off the resulting price movement. Here's how it works: The spoofing trader puts in a large order to buy or sell a security at an artificial price. Market participants who see that order may also offer to buy or sell the security at the same price. In the meantime, the trader cancels his or her order and takes advantage of others' offers, buying the security at a below-market price and selling it at an above-market price.The practice was explicitly addressed by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, and even before then FINRA rules prohibited the use of manipulative or deceptive quotations, but published reports indicate that spoofing continues to distort securities pricing. While spoofing isn't exclusive to high-frequency trading, the first criminal spoofing case announced by lawmakers did involve a high-frequency trader: Prosecutors in Illinois charged a Chicago trader with spoofing futures markets in 2014.

• Layering: Layering is a form of spoofing in which a trader (or an algorithmic trading program at his disposal) will place multiple orders at varying price points, to create a false impression of the amount of interest in that security. The trader places new buy or sell orders to take advantage of the artificially low or high prices. As with general spoofing, following the beneficial execution, the trader then cancels those orders after they've helped artificially inflate or deflate the security's price. Because of ever-evolving technologies, such major market manipulation can occur within fractions of a second. But also as with general spoofing, layering is generally unlawful and prohibited by FINRA rules.

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With regular fast trading the identity of who is making the high speed trade is known. However, with naked access, their identity is not known. This is made possible by regulated brokerage firms cutting deals with high frequency trading firms or other hedge funds firms, and letting them use their computer access codes to execute high speed trades.

The alternative trading system IEX continues to gain market share and has been referred to as the fastest growing securities market in U.S. history. In order to scale its ability to protect more investors, IEX needs approval from the Securities and Exchange Commission to operate as a stock exchange. But the company is facing a surprising level of opposition, with some even calling the company “un-American.” Brad Katsuyama, IEX’s CEO and co-founder explains:
Jared Meyer: Why was IEX started and how is it different from the existing stock exchanges?
IEX: IEX was started because many of our employees, including me, worked at banks, exchanges, or high-frequency trading (HFT) firms and we all saw, from our different vantage points, how the stock market had become an uneven playing field for regular investors. Stock exchanges were selling data and technology advantages to a small group of HFT firms. These advantages earn the exchanges hundreds of millions of dollars in fees, and give certain purchasers of these advantages the ability to scalp regular investors. Exchanges went from being places that focused on matching buyers and sellers to platforms that create and sell high-frequency trading products. IEX is a market response that eliminates the speed advantages and looks out for the interests of long-term investors.
IEX’s top priority is investor protection—which makes us very different from the other exchanges. We created a “speed bump” of 350 millionths of a second, which has caused a great deal of concern for people who sell speed (the major exchanges) or need speed to make money (select HFT firms). This is why we face opposition. While large segments of the marketplace, including investors both large and small, support IEX, the major exchanges and some high-frequency traders are trying to block us, saying that we should not have the right to compete with the incumbent exchanges.
JM: Is the extent of HFT the problem with the current model? I always thought that it made markets more efficient and responsive.
IEX: HFT is too vaguely defined to give a yes or no response—because it can be beneficial or harmful. The beneficial aspects come from firms that post bids and offers, provide liquidity, and contribute to more efficient markets. Firms such as Sun Trading and Virtu (which wrote a comment letter in support of IEX) do not care about a 350 microsecond speed bump. However, there are also HFT firms who believe that 350 microseconds is critical to what they do, as they look to pick up trading signals so that they can race ahead and pick off trades from regular investors.

One of the benefits of IEX being a market-based solution is that we designed a platform that didn’t have to decide which HFT was beneficial or harmful—we invited all HFT firms to participate. But given the speed bump, many predatory aspects of HFT are deterred and minimized on IEX.
JM: Some people, including former SEC commissioner Paul Atkins, argue that Congress should revise antiquated securities laws before the SEC approves IEX. What do you think of this idea?

IEX: First, lobbying to change the rules before letting a new entrant compete is a common way to delay new competition. It’s a very old tactic. What you see now are some people asking the SEC to revise Regulation National Market System (Reg NMS), which has been heavily debated for the past ten years and will most likely take many more years to update. IEX’s opponents want us to sit on ice for that amount of time, which is a pretty clever way to stifle innovation and competition. We think IEX fits within the current rules and we firmly believe we should have a chance to compete.
Second, regulation cannot solve this problem alone. It is difficult, if not impossible, to effectively regulate rapidly-changing technology . I am sure that many aspects of Reg NMS made sense when they were adopted. For example, under the rules a broker can bypass quotes on an exchange that doesn’t respond immediately, where immediate is defined as one second or less. But one second in today’s marketplace is an eternity, so in ten years that particular exception has become obsolete. Market-driven innovation will be far better at adapting to technological changes than regulation can, as long as new entrants are given that opportunity.
JM: To continue to operate, does IEX need Congress to pass any new laws or the SEC to make any more rules? Or does the company only need the SEC’s approval?
IEX: We are not asking for new laws or rules. Our position all along has been that our model fits within the existing regulatory structure, yet it has the potential to rectify many market structure issues that have emerged.
The irony is that IEX was designed to serve the same principles that exchange regulations were put in place to uphold. IEX is helping to return integrity to the public markets. We do this by prioritizing the investor: we protect them from latency arbitrage on IEX as well as on other exchanges when trading through our router. In fact, the router’s ability to protect investors imposes costs on predatory HFT by forcing them to honor their bids and offers across the market, not just on IEX—which is why some HFT are so upset.

the source

Henri Waelbroeck seems to fit the popular image of the scientist transplanted into the world of high finance and hedge fund trading, the sort of stereotype found in books like "The Fear Index" by Robert Harris.

Waelbroeck, director of research at machine learning-enhanced trade execution system Portware, was previously a professor at the Institute of Nuclear Sciences at the National University of Mexico (UNAM). His areas of expertise include: complex systems science, quantum gravity theories, genetic algorithms, artificial neural networks, chaos theory.

The impression Waelbroeck conveys is one of precision. He explains that algorithms have grown in complexity since being introduced to the world of trading around 2000. This has made it increasingly difficult for traders to understand each vendor's full algorithm platform and how to optimally select an algorithm for each particular trade that comes in from a portfolio manager. Portware leverages artificial intelligence to help traders use execution algorithms and in some cases provides automated execution solutions that select the optimal control parameters on algorithms.

"Our work really has focused on two objectives: the first is to find an optimal execution schedule for each trade, and the second is to interact with the order flow more efficiently to avoid the harmful effects of high frequency trading (HFT)," Waelbroeck told IBTimes.

the source

In the age of ultra-high-frequency trading, financial institutions are turning to artificial intelligence to improve their stock trading performance and boost profit.

One such company is Japan's leading brokerage house Nomura Securities. The company has been pursuing one goal: to simulate the insights of experienced stock traders with the help of computers. After years of research, Nomura is set to introduce a new stock trading system for institutional investors in May.

The new system stores vast amounts of price and trading data in its computer. By tapping into this reservoir of information, it will make assessments -- for example, it may determine that current market conditions are similar to a moment two weeks ago -- and predict how share prices will be trending a few minutes down the line.

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