High Speed Trading

I open up this thread because being watch on youtube about High Speed Trading by CNNMoney. It is quite interesting how those guys managed stocks trading in high speed or high frequency. Let's watch it. If anyone want to discuss about it feel free to do so.

High-frequency_trading

High-frequency trading (HFT) is a type of algorithmic trading, specifically the use of sophisticated technological tools and computer algorithms to rapidly trade securities. HFT uses proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second. Firms focused on HFT rely on advanced computer systems, the processing speed of their trades and their access to the market.

As of 2009, studies suggested HFT firms accounted for 60-73% of all US equity trading volume, with that number falling to approximately 50% in 2012.

High-frequency traders move in and out of short-term positions aiming to capture sometimes just a fraction of a cent in profit on every trade. HFT firms do not employ significant leverage, accumulate positions or hold their portfolios overnight; they typically compete against other HFTs, rather than long-term investors. As a result, HFT has a potential Sharpe ratio (a measure of risk and reward) thousands of times higher than traditional buy-and-hold strategies.

HFT may cause new types of serious risks to the financial system.[10][11] Algorithmic and HFT were both found to have contributed to volatility in the May 6, 2010 Flash Crash, when high-frequency liquidity providers rapidly withdrew from the market. Several European countries have proposed curtailing or banning HFT due to concerns about volatility. Other complaints against HFT include the argument that some HFT firms scrape profits from investors when index funds rebalance their portfolios.

History

Profiting from speed advantages in the market is as old as trading itself. In the 17th century, the Rothschilds were able to arbitrage prices of the same security across country borders by using carrier pigeons to relay information before their competitors. HFT modernises this concept using the latest communications technology.

High-frequency trading has taken place at least since 1999, after the U.S. Securities and Exchange Commission (SEC) authorized electronic exchanges in 1998. At the turn of the 21st century, HFT trades had an execution time of several seconds, whereas by 2010 this had decreased to milli- and even microseconds. Until recently, high-frequency trading was a little-known topic outside the financial sector, with an article published by the New York Times in July 2009 being one of the first to bring the subject to the public's attention. On September 2, 2013, Italy became the world's first country to introduce a tax specifically targeted at HFT, charging a levy of 0.002% on equity transactions lasting less than 0.5 seconds.

Market growth

In the early 2000s, high-frequency trading still accounted for fewer than 10% of equity orders, but this proportion was soon to begin rapid growth. According to data from the NYSE, trading volume grew by about 164% between 2005 and 2009 for which high-frequency trading might be accounted. As of the first quarter in 2009, total assets under management for hedge funds with high-frequency trading strategies were $141 billion, down about 21% from their peak before the worst of the crises. The high-frequency strategy was first made successful by Renaissance Technologies. Many high-frequency firms are market makers and provide liquidity to the market which has lowered volatility and helped narrow Bid-offer spreads, making trading and investing cheaper for other market participants. In the United States, high-frequency trading firms represent 2% of the approximately 20,000 firms operating today, but account for 73% of all equity orders volume. The largest high-frequency trading firms in the US include names like Getco LLC, Knight Capital Group, Jump Trading, and Citadel LLC. The Bank of England estimates similar percentages for the 2010 US market share, also suggesting that in Europe HFT accounts for about 40% of equity orders volume and for Asia about 5-10%, with potential for rapid growth. By value, HFT was estimated in 2010 by consultancy Tabb Group to make up 56% of equity trades in the US and 38% in Europe.

As HFT strategies become more widely used, it can be more difficult to deploy them profitably. According to an estimate from Frederi Viens of Purdue University, profits from HFT in the U.S. has been declining from an estimated peak of $5bn in 2009, to about $1.25bn in 2012.

High Frequency Trading Strategies

High-frequency trading is quantitative trading that is characterized by short portfolio holding periods (see Wilmott (2008)). All portfolio-allocation decisions are made by computerized quantitative models. The success of high-frequency trading strategies is largely driven by their ability to simultaneously process volumes of information, something ordinary human traders cannot do. Specific algorithms are closely guarded by their owners and are known as "algos". Many practical algorithms are in fact quite simple arbitrages which could previously have been performed at lower frequency—competition tends to occur though who can execute them the fastest rather than who can create new breakthrough algorithms. Some examples of standard arbitrages used in HFT are listed below.

Trading ahead of index fund rebalancing

Most retirement savings, such as private pension funds or 401(k) and individual retirement accounts in the US, are invested in mutual funds, the most popular of which are index funds which must periodically "rebalance" or adjust their portfolio to match the new prices and market capitalization of the underlying securities in the stock or other index that they track. This allows algorithmic traders (80% of the trades of whom involve the top 20% most popular securities) to anticipate and trade ahead of stock price movements caused by mutual fund rebalancing, making a profit on advance knowledge of the large institutional block orders. This results in profits transferred from investors to algorithmic traders, estimated to be at least 21 to 28 basis points annually for S&P 500 index funds, and at least 38 to 77 basis points per year for Russell 2000 funds. John Montgomery of Bridgeway Capital Management says that the resulting "poor investor returns" from trading ahead of mutual funds is "the elephant in the room" that "shockingly, people are not talking about."

Market making

Market making is a set of high-frequency trading strategies that involve placing a limit order to sell (or offer) or a buy limit order (or bid) in order to earn the bid-ask spread. By doing so, market makers provide counterpart to incoming market orders. Although the role of market maker was traditionally fulfilled by specialist firms, this class of strategy is now implemented by a large range of investors, thanks to wide adoption of direct market access. As pointed out by empirical studies. this renewed competition among liquidity providers causes reduced effective market spreads, and therefore reduced indirect costs for final investors.

Some high-frequency trading firms use market making as their primary trading strategy. Automated Trading Desk, which was bought by Citigroup in July 2007, has been an active market maker, accounting for about 6% of total volume on both the NASDAQ and the New York Stock Exchange. Building up market making strategies typically involves precise modeling of the target market microstructure together with stochastic control techniques.

These strategies appear intimately related to the entry of new electronic venues. Academic study of Chi-X's entry into the European equity market reveals that its launch coincided with a large HFT that made markets using both the incumbent market, NYSE-Euronext, and the new market, Chi-X. The study shows that the new market provided ideal conditions for HFT market-making, low fees (i.e., rebates for quotes that led to execution) and a fast system, yet the HFT was equally active in the incumbent market to offload nonzero positions. New market entry and HFT arrival are further shown to coincide with a significant improvement in liquidity supply.

Ticker tape trading

Much information happens to be unwittingly embedded in market data, such as quotes and volumes. By observing a flow of quotes, high-frequency trading machines are capable of extracting information that has not yet crossed the news screens. Since all quote and volume information is public, such strategies are fully compliant with all the applicable laws.

Filter trading is one of the more primitive high-frequency trading strategies that involves monitoring large amounts of stocks for significant or unusual price changes or volume activity. This includes trading on announcements, news, or other event criteria. Software would then generate a buy or sell order depending on the nature of the event being looked for.

Tick trading often aims to recognize the beginnings of large orders being placed in the market. For example, a large order from a pension fund to buy will take place over several hours or even days, and will cause a rise in price due to increased demand. An arbitreur can try to spot this happening then buy up the security, then profit from selling back to the pension fund. This strategy has become more difficult since the introduction of dedicated trade execution companies in the 2000s which provide optimal trading for pension and other funds, specifically designed to remove the arbitrage opportunity.

Event arbitrage

Certain recurring events generate predictable short-term responses in a selected set of securities. High-frequency traders take advantage of such predictability to generate short-term profits.

Statistical arbitrage

Another set of high-frequency trading strategies are strategies that exploit predictable temporary deviations from stable statistical relationships among securities. Statistical arbitrage at high frequencies is actively used in all liquid securities, including equities, bonds, futures, foreign exchange, etc. Such strategies may also involve classical arbitrage strategies, such as covered interest rate parity in the foreign exchange market, which gives a relationship between the prices of a domestic bond, a bond denominated in a foreign currency, the spot price of the currency, and the price of a forward contract on the currency. High-frequency trading allows similar arbitrages using models of greater complexity involving many more than four securities. The TABB Group estimates that annual aggregate profits of high-frequency arbitrage strategies currently exceed US$21 billion which conflicts with the findings in the Perdue study which estimates the profits for all high frequency trading to be $1.25bn in 2012.

News-based trading

Company news in electronic text format is available from many sources including commercial providers like Bloomberg, public news websites, and Twitter feeds. Automated systems can identify company names, keywords and sometimes semantics to trade news before human traders can process it.

Low-latency strategies

A separate, "naïve" class of high-frequency trading strategies relies exclusively on ultra-low latency direct market access technology. In these strategies, computer scientists rely on speed to gain minuscule advantages in arbitraging price discrepancies in some particular security trading simultaneously on disparate markets.

Another aspect of low latency strategy has been the switch from fiber optic to microwave technology for long distance networking. Especially since 2011, there has been a trend to use microwaves to transmit data across key connections such as the one between New York and Chicago. This is because microwaves travelling in air suffer a less than 1% speed reduction compared to light travelling in a vacuum, whereas with conventional fiber optics light travels over 30% slower.

In 2010, Alex Wissner-Gross at Harvard University proposed an optimally low-latency solution for statistical arbitrage of geographically separated financial instruments.

Effects

The effects of algorithmic and high-frequency trading are the subject of ongoing research. Regulators claim these practices contributed to volatility in the May 6, 2010 Flash Crash and find that risk controls are much less stringent for faster trades.

Members of the financial industry generally claim high-frequency trading substantially improves market liquidity, narrows bid-offer spread, lowers volatility and makes trading and investing cheaper for other market participants.

An academic study found that, for large-cap stocks and in quiescent markets during periods of "generally rising stock prices", high-frequency trading lowers the cost of trading and increases the informativeness of quotes; however, it found "no significant effects for smaller-cap stocks", and "it remains an open question whether algorithmic trading and algorithmic liquidity supply are equally beneficial in more turbulent or declining markets...algorithmic liquidity suppliers may simply turn off their machines when markets spike downward."

In September 2011, Nanex, LLC (a high-frequency trading software company) published a report stating the contrary. They looked at the amount of quote traffic compared to the value of trade transactions over 4 and half years and saw a 10-fold decrease in efficiency.[52] Many discussions about HFT focus solely on the frequency aspect of the algorithms and not on their decision-making logic (which is typically kept secret by the companies that develop them). This makes it difficult for observers to pre-identify market scenarios where HFT will dampen or amplify price fluctuations. The growing quote traffic compared to trade value could indicate that more firms are trying to profit from cross-market arbitrage techniques that do not add significant value through increased liquidity when measured globally.

More fully automated markets such as NASDAQ, Direct Edge, and BATS, in the US, have gained market share from less automated markets such as the NYSE. Economies of scale in electronic trading have contributed to lowering commissions and trade processing fees, and contributed to international mergers and consolidation of financial exchanges.

The speeds of computer connections, measured in milliseconds or microseconds, have become important. Competition is developing among exchanges for the fastest processing times for completing trades. For example, in 2009 the London Stock Exchange bought a technology firm called MillenniumIT and announced plans to implement its Millennium Exchange platform[55] which they claim has an average latency of 126 microseconds. Since then, competitive exchanges have continued to reduce latency, and today, with turnaround times of three milliseconds available, are useful to traders to pinpoint the consistent and probable performance ranges of financial instruments. These professionals are often dealing in versions of stock index funds like the E-mini S&Ps because they seek consistency and risk-mitigation along with top performance. They must filter market data to work into their software programming so that there is the lowest latency and highest liquidity at the time for placing stop-losses and/or taking profits. With high volatility in these markets, this becomes a complex and potentially nerve-wracking endeavor, in which a small mistake can lead to a large loss. Absolute frequency data play into the development of the trader's pre-programmed instructions.

Spending on computers and software in the financial industry increased to $26.4 billion in 2005.

May 6, 2010 Flash Crash

The brief but dramatic stock market crash of May 6, 2010 was initially thought to have been caused by high-frequency trading. The Dow Jones Industrial Average plunged to its largest intraday point loss, but not percentage loss, in history, only to recover much of those losses within minutes.

In the aftermath of the crash, several organizations argued that high-frequency trading was not to blame, and may even have been a major factor in minimizing and partially reversing the Flash Crash. CME Group, a large futures exchange, stated that, insofar as stock index futures traded on CME Group were concerned, its investigation had found no support for the notion that high-frequency trading was related to the crash, and actually stated it had a market stabilizing effect.

However, after almost five months of investigations, the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission issued a joint report identifying the cause that set off the sequence of events leading to the Flash Crash and concluding that the actions of high-frequency trading firms contributed to volatility during the crash.

The report found that the cause was a single sale of $4.1 billion in futures contracts by a mutual fund, identified as Waddell & Reed Financial, in an aggressive attempt to hedge its investment position. The joint report also found that "high-frequency traders quickly magnified the impact of the mutual fund's selling."The joint report "portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral," that a large mutual fund firm "chose to sell a big number of futures contracts using a computer program that essentially ended up wiping out available buyers in the market," that as a result high-frequency firms "were also aggressively selling the E-mini contracts," contributing to rapid price declines. The joint report also noted "'HFTs began to quickly buy and then resell contracts to each other — generating a 'hot-potato' volume effect as the same positions were passed rapidly back and forth.'" The combined sales by Waddell and high-frequency firms quickly drove "the E-mini price down 3% in just four minutes."As prices in the futures market fell, there was a spillover into the equities markets where "the liquidity in the market evaporated because the automated systems used by most firms to keep pace with the market paused" and scaled back their trading or withdrew from the markets altogether. The joint report then noted that "Automatic computerized traders on the stock market shut down as they detected the sharp rise in buying and selling." As computerized high-frequency traders exited the stock market, the resulting lack of liquidity "...caused shares of some prominent companies like Procter & Gamble and Accenture to trade down as low as a penny or as high as $100,000." While some firms exited the market, high-frequency firms that remained in the market exacerbated price declines because they "'escalated their aggressive selling' during the downdraft."

Risks and controversy

Various studies have reported that high-frequency reduces volatility and does not pose a systemic risk, and lowers transaction costs for retail investors, without impacting long term investors, However, high-frequency trading has been the subject of intense public focus and debate since the May 6, 2010 Flash Crash. At least one Nobel Prize winning economist, Michael Spence, believes that HFT should be banned.

In their joint report on the 2010 Flash Crash, the Securities Exchange Commission and the Commodity Futures Trading Commission stated that "market makers and other liquidity providers widened their quote spreads, others reduced offered liquidity, and a significant number withdrew completely from the markets"[64] during the Flash Crash.

Politicians, regulators, journalists and market participants have all raised concerns on both sides of the Atlantic. and this has led to discussion of whether high-frequency market makers should be subject to various kinds of regulations.

In September 22, 2010 speech, SEC chairperson Mary Schapiro signaled that US authorities were considering the introduction of regulations targeted at HFT. She said, "...high frequency trading firms have a tremendous capacity to affect the stability and integrity of the equity markets. Currently, however, high frequency trading firms are subject to very little in the way of obligations either to protect that stability by promoting reasonable price continuity in tough times, or to refrain from exacerbating price volatility." She proposed regulation that would require high-frequency traders to stay active in volatile markets.

The Chicago Federal Reserve letter of October 2012, titled "How to keep markets safe in an era of high-speed trading," reports on the results of a survey of several dozen financial industry professionals including traders, brokers, and exchanges. It found that

risk controls were poorer in high-frequency trading, because of competitive time pressure to execute trades without the more extensive safety checks normally used in slower trades.
"some firms do not have stringent processes for the development, testing, and deployment of code used in their trading algorithms."
"out-of control algorithms were more common than anticipated prior to the study and that there were no clear patterns as to their cause. Two of the four clearing BDs/FCMs, two-thirds of proprietary trading firms, and every exchange interviewed had experienced one or more errant algorithms."

The letter recommended new controls on high-frequency trading, including:

Limits on the number of orders that can be sent to an exchange within a specified period of time
A “kill switch” that could stop trading at one or more levels
Intraday position limits that set the maximum position a firm can take during one day
Profit-and-loss limits that restrict the dollar value that can be lost.

Flash Trading

Another area of concern relates to flash trading. Flash trading is a form of trading in which certain market participants are allowed to see incoming orders to buy or sell securities very slightly earlier than the general market participants, typically 30 milliseconds, in exchange for a fee. This feature was introduced to allow participants like market makers the opportunity to meet or improve on the National best bid and offer price to ensure incoming orders were matched at the most advantageous prices according to Regulation NMS.

According to some sources, the programs can inspect major orders as they come in and use that information to profit. Currently, the majority of exchanges either do not offer flash trading, or have discontinued it. In March 2011, Direct Edge ceased offering its Competition for Price Improvement functionality (widely referred to as "flash technology/trading").

Inside Trading

On September 24, 2013 it was revealed that some traders are under investigation for possible news leak and inside trading. Right after Federal Reserve announced its newest decision trades were registered in Chicago future market within 2 milliseconds. The information of such decision, calibrated to release at exactly 2 pm using atomic clock, takes seven millisecond to reach Chicago at the speed of light. Anything faster is not physically possible. (See Superluminal communication).

Advanced trading platforms

Advanced computerized trading platforms and market gateways are becoming standard tools of most types of traders, including high-frequency traders. Broker-dealers now compete on routing order flow directly, in the fastest and most efficient manner, to the line handler where it undergoes a strict set of Risk Filters before hitting the execution venue(s). Ultra Low Latency Direct Market Access (ULLDMA) is a hot topic amongst Brokers and Technology vendors such as Goldman Sachs, Credit Suisse, and UBS.[citation needed] Typically, ULLDMA systems can currently handle high amounts of volume and boast round-trip order execution speeds (from hitting "transmit order" to receiving an acknowledgment) of 10 milliseconds or less.

Such performance is achieved with the use of hardware acceleration or even full-hardware processing of incoming market data, in association with high-speed communication protocols, such as 10 Gigabit Ethernet or PCI Express. More specifically, some companies provide full-hardware appliances based on FPGA technology to obtain sub-microsecond end-to-end market data processing.

In Defense Of High Frequency Trading via the ECB/

The electronically thundering herd that is the community of high-frequency traders has found a surprising ally: the European Central Bank.

AFP

The Frankfurt-based institution published a working paper on its website Tuesday which came down pretty firmly on the side of the much-maligned cyber-traders, agreeing with their long-held presentation of themselves as a force for efficient and competitive markets.

The authors of the report conclude that HFT generally goes in the direction of correct price signals and against “noise” or short-term volatility, promoting efficiency “both on average and on the highest volatility days.” That last claim is crucial, given the widespread belief among governments that the small-scale individual traders who are so active in HFT are wont to take their precious liquidity off the table at the first sign of volatility.

Before anyone gets too carried away, the view isn’t an official one: all the ECB’s working papers are presented as the opinions not of the bank, but of their authors — in this case Jonathan Brogaard, Terrence Hendershott and Ryan Riordan, three academics of transatlantic origin, all with a track record of defending HFT, and none of them permanently retained by the ECB. Moreover, a cynic would point out that the authors have drawn their data only from U.S. equity markets. One might be forgiven for thinking that the ECB would have given the paper a heavier edit if it had been euro-zone government bonds, rather than U.S. equities, that had melted down in a ‘”flash crash” at the height of the euro crisis.

So it isn’t like the spirit that moved the European Commission and the German government to regulate high-frequency hijinks has evaporated overnight.

But all the same, the ECB knows full well that anything that appears on its website is going to have the implicit imprimatur of Europe’s most powerful financial institution. And its support for efficient markets is of a piece with (if not directly connected to) its opposition to the EU’s proposed Financial Transaction Tax.

Against that background, the language in which the authors couch their conclusions is particularly striking.

“Our results have implications for policy makers that are contemplating the introduction of measures to curb HFT,” they write, stressing HFT’s usefulness to markets. “Introducing measures to curb their activities without corresponding measures to that support price discovery and market efficiency improving activities could result in less efficient markets.”

It’s surely no coincidence that this is coming out as the European Parliament thrashes out new regulations on HFT, due to be written into its updated “Markets in Financial Instruments Directive”, or MiFID 2, as it’s known.

Relations between the ECB and EU Parliament are, to say the least, pretty frosty at the moment, owing to some sharply divergent views over how much in “accountability” the ECB will owe the Parliament when it assumes the role of banking supervisor.

At times like that, it’s so much nicer, if you have to say that a particular legislative initiative is a misguided knee-jerk or just plain financially illiterate, to have some experts say it for you…

CNN's Maggie Lake gets a rare look inside the super-fast trading industry.

in praise of high frequency traders/



On Thursday, the Investment Industry Regulatory Organization of Canada (IIROC) is scheduled to release its much-awaited study on high frequency traders. The standard image of the high frequency trader (HF trader) is that of a slavering troll working assiduously to destabilize world stock markets and laughing gleefully while prying gold fillings out of retail traders’ mouths. In the minds of many, HF traders caused or greatly contributed to the infamous U.S. “Flash Crash” of May 2010, when the Dow Jones plunged (and then recovered) 1000 points (roughly 9%) in a matter of minutes. HF traders also stand accused of increasing trading costs for both retail and institutional traders.

Academic evidence, however, suggests that HF traders sport toes, not cloven hoofs. Indeed, as noted by the European Commission, “HFT is typically not a strategy in itself but the use of very sophisticated technology to implement traditional trading strategies.” The essence of the “sophisticated technology” is speed. HF traders use highly refined computer algorithms to wade through reams and reams of data, spot profit opportunities, and execute trades to exploit these opportunities. HF traders also use “co-location” to enhance speed. This refers to the now-common practice of paying for the privilege of locating one’s servers in the same building as a trading venue’s computer matching engine (where trades actually get executed). This reduces system “latency” (the time it takes for a message to travel from the HF trader’s computer to the trading venue’s computer, and vice-versa) to a bare minimum.

The HF trader’s speed advantage in general, and co-location in particular, have been much vilified. But superior speed is neither new nor objectionable. Savvy stock traders have long enlisted the latest information technologies to gain an advantage over their rivals. At one time, carrier pigeons and optical semaphore systems were the preferred tools.These gave way, in succession, to the telegraph, the telephone, the Internet, dedicated data lines, and now, co-location. Being the first in line has been a source of profit as long as there have been tradable assets. That goes back not merely decades or centuries, but millennia.

While the clay-footed are never amused to see more fleet-of-foot rivals steal their business, a simple self-help strategy awaits – go out and get your own carrier pigeons. And indeed, more and more traditional players, such as sell-side institutions, are doing just that, putting their own servers in co-location facilities and competing head-to-head with HF traders.

But in any case, the corpus of academic evidence suggests that both retail and institutional traders have benefited from the presence of HF traders. Market making is a case in point. HF traders effectively “make a market” in particular stocks by posting limit orders to buy and sell on the books of various trading venues. However, they are able to quote much narrower bid/ask spreads than traditional market makers.

This is a direct result of their speed. HF traders have no interest in holding stock overnight. As soon as they purchase shares in a given company, they look to sell these shares, and often do so within milliseconds. The extremely short interval between the two legs of any round trip transaction (buy/sell or sell/buy) minimizes the extent to which the HF trader is exposed to what economists call “adverse selection risk,” which is the risk of adverse price movements between the first and the second leg of the round trip. This enables them to effectively quote very tight bid/ask spreads. The academic studies are virtually unanimous in suggesting that when HF traders arrive, bid/ask spreads shrink by a material amount. This benefits all other traders, whether retail or institutional.

HF traders have benefited from the now common practice of “maker/taker” pricing. This involves paying a rebate to the “passive” side of a transaction (the party who enters a limit buy or sell order on the books of a given trading venue) and charging a fee to the “active” side (a later-arriving order that is matched to the passive order, resulting in a completed trade). Speedy HF traders are more likely than others to be on the passive side of a transaction, and thus go home with the lion’s share of the trading rebates.

On the other hand, many non-HF traders (i.e. the ones who now disproportionately end up on the active side of the transaction) have seen their trading costs increase. Nonetheless, it is not clear if this increased trading cost is passed on to the client, as opposed to being partly or wholly absorbed by the market professional (as we would expect in a competitive market). But even if all of the cost is passed on to the trading client, reductions in bid/ask spreads more than compensate.

HF traders are associated with other improvements in market microstructure. For example, studies show that HF traders are more likely to be “informed” traders, and that their presence in a given market improves price discovery (the rapidity with which new information is impounded in the public share price). As against the charge that HF traders make financial markets more volatile, the studies show that when HF traders come calling, intraday price volatility (the degree to which stock prices fluctuate during the course of the day) actually diminishes.

And what of the Flash Crash? The Crash was triggered when a single U.S. mutual fund decided to liquidate $4.1-billion of something called the E-Mini S&P 500 (an equity futures contract based on the value of the S&P 500). Initially, HF traders absorbed some of this volume. However, when it came to executing the second leg of the round trip and selling the E-Mini to someone else, there was trouble. The volume of the mutual fund’s sale order was so large that it exerted a continual downward pressure on the price of the E-Mini. HF traders – just like traditional market makers – found that they could not buy cheap and sell dear. Many withdrew from the market, causing E-Mini liquidity to dry up. Even worse, the liquidity drought was transmitted broadly throughout the market, since the falling value of the E-Mini implied lower values of the stocks underlying the E-Mini contract – namely, the entire S&P 500. These stocks (and others) also went into a death spiral. The imbroglio was ended by a trading halt. Five minutes later, trading was restored, and the market recovered and marched stoically onward.

The Flash Crash is in indictment of HF traders only if we can conclude that they bailed from the market faster than traditional market makers. In fact, the evidence is precisely the opposite; some HF traders hung in until the bitter end. Moreover, numerous studies show that HF traders are slower than traditional players to run for the exits when the going gets rough. A market populated only by traditional market makers would not have avoided the Flash Crash.

Despite all of the favourable academic reviews, many institutional traders swear up and down that HF traders engage in a bevy of manipulative or otherwise unfair trading practices. One Canadian study by Cumming et al., however,finds that HF traders reduce the incidence of end-of-day price manipulation. A U.S. study finds that HF traders do not “front run” institutional orders, as has often been alleged. Nonetheless, the empirical record in this respect is not well developed, and there is certainly anecdotal evidence of dirty tricks being played by HF traders. Academics need to sharpen their pencils in this regard and Canadian regulators need to stay sharp and devise means of detecting these dirty deeds and punishing them accordingly.

A further caveat is that HF trading has led to an increasingly intense arms race with a view to shaving not merely milliseconds, but microseconds off system latency. At some point, the commitment of ever-larger sums of money to slicing ever-smaller fractions of time off trading times, just to be first in line, becomes socially counter-productive. In other words, the last chapter on HF trading has not yet been written.

Jeffrey G. MacIntosh is Toronto Stock Exchange Professor of Capital Markets, Faculty of Law, University of Toronto, and author of C.D. Howe Institute’s “High Frequency Traders: Angels or Devils?”

A Cheat Sheet on European High Frequency Trading Firms : WSJ Blog

High frequency trading firms are a divisive lot. Blamed for using algorithms that can wreak havoc in the market, gaining early peeks into market-moving data, for trading on news faster than news can be disseminated, they’ve nevertheless found support from some unlikely quarters, such as traditional exchanges, and even this working paper on the European Central Bank’s website.

Through tough times they’ve remained highly revenue-generative and are looking for new opportunities to grow.

So who exactly are these firms?

Sister paper Financial News has put together this cheat sheet of the 10 European HFT firms widely acknowledged by market practitioners as the best of the bunch.

• Flow Traders
Based: Amsterdam
Ownership: U.S. private equity firm Summit Partners holds a significant minority interest, with employees owning the remainder
Key people: Roger Hodenius and Jan van Kuijk, co-founders and co-chief executives

Flow Traders was founded in 2004 by Roger Hodenius and Jan van Kuijk, two traders from rival Dutch firm Optiver. The firm now has a workforce of over 200, with offices in Asia and the U.S., and is a member of around 75 exchanges globally. It is regarded as a leading marketmaker in exchange-traded funds, but is active across multiple asset classes. It was one of the four founding members of HFT lobby group the FIA European Principal Traders Association in June 2011. Last year, it appointed Lazard as an adviser to oversee a strategic review of the business as investor Summit Partners reviewed its holding in the company. A potential sale of the business was considered with interested parties, but Dennis Dijkstra, its chief financial officer, said that was now “off the table”, as a price could not be agreed. He added that the company was in expansive mode: “We have around 200 full-time employees and are actively hiring. Our main opportunity to grow is in the U.S.”

2012 financials
Revenues at its Amsterdam office: down 20% to €62.4 million ($84.5 billion), while net profits down 35% to €19.9 million

• HRT Europe
Based: London
Ownership: Affiliate of New York-based Hudson River Trading
Key people: Landis Olson, European president

HRT was founded in 2002 by former traders from rival firm Tower Research Capital, where they ran a trading group called Hudson River. The firm now has 100 employees, with satellite offices in London and Singapore. The London entity houses primarily operational, compliance and market relations staff, numbering between 10 and 20, who support U.S. teams trading on European exchanges. In September it was formally authorized by the U.K.’s Financial Conduct Authority as a proprietary trading firm, in a move anticipating future European regulation and allowing it to pursue opportunities that require authorization. HRT takes a highly collaborative approach to developing new trading strategies, with a centralized group of trading and quantitative research teams in New York. Each August it takes on a new class of employees, typically straight out of university. Landis Olson, a former executive with Instinet and Nasdaq OMX, was appointed president of its European office in 2009. He is responsible for the firm’s trading systems and controls in Europe, and expanding the business into further geographies and asset classes.

2012 financials
Revenues: up 25% to £10.6 million ($17.1 million), while net profits down 32% to £214,177

• IMC
Based: Amsterdam
Ownership: Privately owned by individuals and staff
Key people: Rob Defares and Wiet Pot, co-founders and co-chief executives

IMC was founded in Amsterdam in 1989 by two marketmakers working on the open outcry floor of Europe’s first options exchange. It has grown rapidly and now has more than 500 staff globally, with offices in the U.S., Switzerland and Australia. It is an active member of more than 40 of the world’s largest exchanges. Last year was a turbulent one for the firm. It merged its trading operations in Hong Kong and Sydney, was fined by Hong Kong’s financial regulator for internal control failings and its chief financial officer, Osi Lilian, was forced to renounce his management role following a tax probe into his personal financial affairs. It was one of the four founding members of the HFT lobby group, the FIA EPTA, and last year took a minority stake in fledgling Dutch equity derivatives platform The Order Machine.

2012 financials
Revenues: undisclosed

• Jump Trading International
Based: London
Ownership: Affiliate of Chicago-based Jump Trading
Key people: Peter Deaner, head of European business development

Founded in Chicago in 1999, Jump’s strength lies in futures across multiple asset classes. It has actively traded in London since 2009 and last year moved to larger offices at One London Wall. That move was part of plans to continue to grow the European business, and “improve the firm’s overall infrastructure and business continuity plans from a global perspective”, Mr. Deaner told Financial News last year. In its most recent U.K. financial statements, the firm’s directors said the company had made a “significant investment in its London office and personnel to ensure the continued growth of the business.” It employs about 40 people in London, with recent hires including a team of former traders from Bank of America Merrill Lynch’s quantitative statistical arbitrage trading group. Jump operates around 19 trading teams globally, one of which is based in London. It operates a collaborative infrastructure model, whereby technology developed by individual trading teams can be used across the firm, a person familiar with the business said.

2012 financials
Revenues: down 4.5% to $14.7 million, while net profits down 86% to $1.2 million

• KCG Europe
Based: London
Ownership: Affiliate of New York-based KCG Holdings
Key people: Ryan Primmer, KCG’s global head of fixed income, currency and commodities, who oversees European trading

KCG was formed this year through a $1.4 billion merger between the Chicago-based high-frequency trading specialist Getco and brokerage Knight Capital. KCG’s executives are already steering the firm away from Getco’s high-speed trading roots, and building on Knight’s institutional and retail client business. Last month, Robert Smith, KCG’s head of Europe and the former head of Getco’s European business, left the firm. He was replaced by former Knight executive, Albert Maasland, who had been KCG’s global head of execution services and venue. The former Getco business remains a sizeable marketmaker on European exchanges, and is active across fixed income, equities, commodities and foreign exchange. One of the first movers in European high-speed trading, Getco was a founding member of the FIA EPTA and was a key supporter of alternative venues such as Chi-X Europe. It held a 14% stake in the venue before its 2011 sale to Bats Global Markets. As its results show, its revenues peaked in 2008 and have slumped since, as its technology has been usurped by that at rival firms, according to practitioners.

2012 financials
Revenues (Getco Europe): down 44% to $117.8 million, while net profits down 81% to $16 million

• Optiver
Based: Amsterdam
Ownership: Privately owned by partners, employees and former staff
Key people: Johann Kaemingk, founder and chairman

Optiver was founded in 1986 as a marketmaker on the Dutch options exchange, and its strength has traditionally lay in trading equity derivatives and equity indexes-linked derivatives. It now operates across asset classes, with close to 700 staff globally, with main offices in Chicago and Sydney. In addition to being an electronic marketmaker, it is also a big participant trader in Europe’s “call-around” listed options market, a voice-driven business. It was also one of the four founding members of lobby group the FIA EPTA and a backer of alternative venue Chi-X Europe, holding a 5% stake before its sale to Bats Global Markets in 2011. More than half of Optiver’s revenues came from outside the European Union for the first time last year. The firm opened a Shanghai office at the beginning of this year, adding to smaller presences in Taipei and Hong Kong. The company remains in expansive mode. Hans Pieterse, a European managing director, said: “We are continuing to hire high quality trading staff, as well as IT, compliance and risk professionals.”

2012 financials
Revenues: down 24% to €370.1 million ($501.2 million), while net profits down 11.4% to €141.6 million

• RSJ Algorithmic Trading
Based: Prague
Ownership: Privately owned by individuals and employees
Key people: Karel Janecek, founder and chief executive and Bronislav Kandrik, head of trading

RSJ was founded in the Czech city of Plzen in 1994 by maths whizz Karel Janecek. Mr. Janecek’s other achievements include writing acclaimed software enabling professional blackjack players to optimise their playing strategy. RSJ has historically traded interest rate futures, and is one of the largest participants on NYSE Liffe, the futures exchange now owned by IntercontinenalExchange. It is also a member of ICE’s exchanges, CME Group and Deutsche Börse’s Eurex derivatives market. It has gradually been expanding its range of asset classes and this year made its first step outside futures by trading on-the-run US Treasuries on eSpeed, the Nasdaq-owned fixed income market and BrokerTec, Icap’s bond platform, Kandrik said. The company employs about 65 people, and typically adds a handful of staff each year. Kandrik told Financial News: “RSJ takes a collaborative approach, we don’t have internal teams competing with one another.”

2012 financials
Revenues: undisclosed

• Spire Europe
Based: London
Ownership: Affiliate of New York-based Tower Research Capital
Key people: Alan McGroarty, chief executive

Spire has rapidly become one of Europe’s most active high-speed firms. It is an affiliate of Tower Research Capital, which was founded by Mark Gorton, a former Credit Suisse prop trader. The group has traditionally focused on equities and Spire began actively trading on European stock exchanges in 2009. Since then, its revenues have grown from £5 million, to £73 million in 2012. Spire describes itself as a “proprietary trading firm dealing in equities, futures and foreign currencies”, according to its most recent accounts. It employs between 20 and 30 people in London, a figure which has doubled in recent years, a person close to the business said. Recent hires have included traders and researchers from defunct firm Eladian Partners and McGroarty, a former Citadel, Goldman Sachs and Merrill Lynch executive, as its chief executive. Brook Teeter, a former Getco and Credit Suisse executive, was this year appointed to head its Asian operations. Tower has about 35 trading teams globally. Individual teams can develop their own strategies, while benefiting from a centralized infrastructure.

2012 financials
Revenues: down 24% to £73 million ($122.3 million), while net profits down 40% to £23.7 million

• Sun Trading International
Based: London
Ownership: Affiliate of Chicago-based Sun Holdings
Key people: Asad Samar, managing director and Simon Dove, head of business development

Chicago-based Sun Holdings was founded in 2002 by Jeff Wigley, a former Chicago Board Options Exchange trader. It appointed ex-MF Global chief Bernie Dan as president in December 2010, and since then has been expanding into new regions and products. The group’s U.K. operation was established in 2006 and has been steadily growing since and has a workforce of around 20. It attributed its relatively strong performance last year to revenue diversification efforts begun in 2011. Chris Malo, Sun Trading’s chief financial officer, told Financial News last month that the firm had been “pursuing strategies to diversify our trading across asset classes and geographies, which has helped us to minimize the impact of weaker volumes.” Simon Dove joined the firm in April 2010 from the London Stock Exchange to head its European business development and became part of Sun’s three-person management team in London last year. He oversees the firm’s relationships with trading counterparts, venues, clearers and vendors and is driving the firm’s aggressive growth plans into new asset classes and regions, including Asia.

2012 financials
Revenues: down 1.5% to £18.1 million ($29.3 million) , while net profits down 2.6% to £3.3 million

• Virtu Financial Europe
Based: Dublin
Ownership: Affiliate of New York-based Virtu Financial
Key people: David Furlong, European managing director

Virtu was founded in 2008 by Vinnie Viola, a graduate of US military academy West Point, a former chairman of the New York Mercantile Exchange and the new owner of NHL team Florida Panthers. Virtu merged with another of Viola’s firms, Madison Tyler, in 2011. To streamline the business after that deal, Virtu this year closed its London office and consolidated its European operations into a single HQ in Dublin. It has between 20 and 30 people working in the Irish capital, although that figure is expected to grow beyond 30, a person close to the business said. Virtu is a registered marketmaker across several European exchanges, including the London Stock Exchange. It is active in equities, foreign exchange, fixed income and commodities, the person said. Last September it acquired the marketmaking business of Dutch trading firm Nyenburgh, bolstering its presence in European exchange-traded funds, in which it is highly active.

2012 financials
Revenues: up 307% to €71 million ($98.9 million) , while net losses narrowed from €4.1 million to €2.3 million.

New Research Find HFT Improves Market Fairness


New research from the Capital Markets Cooperative Research Centre (CMCRC) has found that the presence of high frequency traders improves market fairness by reducing end of day price dislocation
Based on study of data from 22 exchanges from around the world, from 2003-2011
Study found that the presence of HFT decreases the probability of end-of-day (EOD) price dislocation by 21%

Says:

End of Day (EOD) price dislocations are troublesome for markets and any market structure change which mitigates the incidence of such changes should be seen as a positive outcomes for the marketplace
HFT was associated with a decrease in the total trading value surrounding each suspected dislocation, by the most conservative estimate of 42% relative to the average size of the total trading value, suggesting that the mere presence of HFT participants in a marketplace may discourage EOD dislocation
The study also examined specific dates when EOD price dislocation was most likely to be manipulated, eg. dates when options expire and end of month/quarter calendar dates. The data showed that in the presence of HFT, EOD price dislocation was less pronounced on these dates as well
“There is an established negative relationship between liquidity and EOD prices (i.e. the higher the liquidity the harder it is to manipulate or the less prices will move) and that HFT by either providing additional liquidity at these points (or because market participants know that HFT are present in a marketplace) appears to reduce EOD dislocation”

A copy of the research paper attached.

I like the strategy of high speed trading but the financial requirements are severe. Generally, trading especially in forex should not last long.

High-Speed Traders Form Trade Group to Press Case

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High-frequency traders are going on defense.

To counter what they say is the industry's unfair reputation as a disruptive force in the markets, a group of high-frequency trading firms have hired a pair of heavy-hitting political strategists and formed a trade group to press their case with regulators and lawmakers.

The strategists, Kevin Madden and Erik Smith, last week submitted paperwork to found a group called the Modern Markets Initiative, with headquarters in Washington, D.C. Backed by four high-speed firms, it plans to bolster a website Tuesday that will include a video arguing that high-frequency traders have made the financial markets cheaper and faster for investors, a blog to respond to critics and links to academic research.

Mr. Madden helped run Mitt Romney's 2012 presidential campaign, and Mr. Smith was a senior adviser to Barack Obama's 2008 and 2012 campaigns.

The move highlights how the upstart computer-driven trading firms, once a marginal, little-known segment on Wall Street, have grown into a mature industry looking to shift the perception of their activities.

High-frequency traders move rapidly in and out of stocks and commodities to capture fleeting shifts in prices. Their activities first drew broad scrutiny after the May 6, 2010, "flash crash," when many of the firms pulled out of stocks, a move some critics say helped worsen a sharp drop in the market.

High-frequency trading firms are responsible for about 50% of trading in the U.S. equities market, according to Rosenblatt Securities, which advises institutional investors on trading.

That number has been relatively stable over the past several years. However, during the second half of 2008 and first half of 2009, at the peak of the financial crisis, that number was closer to 66%, Rosenblatt said. High-frequency trading increases during times of heightened volatility.

An initial goal for the group is to create a new name for the industry. They prefer "automated professional traders" to high-frequency traders.

"One of the things that has been a problem with the phrase high-frequency trading is that it has become a catch-all for anything people don't like," said Peter Nabicht, spokesman for the new group. Mr. Nabicht is a former executive vice president of Chicago-based high-frequency firm Allston Trading LLC.

The industry is under increased scrutiny. The Financial Industry Regulatory Authority, in a letter last week outlining its enforcement priorities for 2014, said it plans to focus on high-frequency trading, known as called HFT. "Although many HFT strategies are legitimate, some are not and may be used for manipulative purposes," Finra said in the letter.

Several regulators, including some with the Securities and Exchange Commission, recently called for a broad review of computer-driven markets amid concerns that trading has become too complex and plagued by glitches. A 40 to 45 minute trading snafu in 2012 by Knight Capital Group that cost the firm nearly $500 million raised concerns that high-speed markets are vulnerable to mistakes that could spread to regular investors.

Not all high-frequency traders employ the same strategy, but they commonly use proprietary algorithms, state-of-the-art computers and ultrafast connections to exchanges. Critics say they take advantage of large institutions, such as mutual funds, by running up prices at lightning speeds once they detect a big buyer or seller in the market.

"There is no doubt that the computerization of Wall Street has been incredible, but there are a lot of problems that need to be investigated," said David Lauer, a former high-frequency trader who now consults on market structure.

High-frequency firms say they have reduced the cost of trading for all investors and made the markets more efficient. The new group plans to spread that message more widely.

"There are a lot of noisy opponents of high-frequency trading, but there hasn't been an organized rebuttal, and that is going to change," said Ari Rubenstein, managing partner of Global Trading Systems LLC, New York, one of the four founding firms of the new group.

The other founding firms are some of the oldest high-frequency traders in the industry: Tower Research Capital LLC and Hudson River Trading LLC, in New York, and Quantlab Financial LLC, in Houston. The group is seeking additional members. The initiative won't be the first to push high-speed traders' agenda. In 2010, about 30 high-speed firms formed the Principal Traders Group, part of the Futures Industry Association trade group, to help shape policy in Washington.

Modern Markets Initiative has already started reaching out to lawmakers, sending a two-page introduction to the group around the Capitol and an email address for contacting its leadership.

Speed Traders Get an Edge : The Wall Street Journal

WASHINGTON—High-frequency traders have been paying to get direct access to market-moving news releases, a practice that can give firms the ability to trade fractions of a second ahead of less fleet-footed investors.

The traders are getting news releases from Business Wire, which distributes corporate-earnings releases and economic reports such as the Philadelphia Federal Reserve's monthly manufacturing survey, and from Marketwired, a Toronto company that distributes earnings releases and the ADP monthly employment report.

Such direct access isn't illegal. By paying for direct feeds from the distributors and using high-speed algorithms to crunch data and enter orders, traders can get a fleeting—but lucrative—edge over other investors, according to traders and people familiar with the practice. The reason: tiny lags between the time the distributors release the news and when media outlets send them out to the public, including other investors.

Investors typically receive earnings reports and other news releases from media companies such as Bloomberg LP and Dow Jones & Co., a unit of News Corp, NWSA which owns The Wall Street Journal, or websites such as Yahoo Finance. Those financial-news outlets get most of these releases from distributors such as Business Wire, which is owned by Warren Buffett's Berkshire Hathaway Inc., BRKB and Marketwired, majority-owned by OMERS Private Equity Inc., an arm of the Ontario Municipal Employees Retirement System.

Business Wire says it doesn't discriminate between clients in the interest of fair access.

"Anyone can get a direct data feed if they want," including high-speed trading firms, said Tom Becktold, a spokesman for Business Wire, which also distributes releases to financial companies such as fund-management firms, Wall Street banks and retail brokers, according to its website. Company spokesman Neil Hershberg said what happens after Business Wire hands off releases is "beyond our control."

Some high-speed firms have had direct access to news releases for at least the past few years, according to people familiar with the situation. These firms typically are paying thousands of dollars a month to get the news releases.

The trend, previously unreported, could help explain what happened on the afternoon of Dec. 5, when Ulta Salon Cosmetics & Fragrance Inc., ULTA a cosmetics retailer based in Bolingbrook, Ill., released its earnings. At 4 p.m. EST, Ulta's stock was changing hands for about $122 a share. Business Wire issued the company's earnings, which missed analysts' forecasts, about 150 milliseconds after 4 p.m., according to a person familiar with the timing of the release. A millisecond is one-thousandth of a second.

Within about 50 milliseconds, nearly $800,000 of Ulta's stock was sold on stock exchanges in a series of rapid trades. But major news wires hadn't yet distributed Ulta's earnings, according to the news wires. Bloomberg News issued the release 242 milliseconds after 4 p.m. Dow Jones issued it 464 milliseconds after 4 p.m. Thomson Reuters Corp. TRI.T -0.05% issued the release about one second after 4 p.m.

About 700 milliseconds after 4 p.m., Ulta's stock reached its closing price of $118 a share on the Nasdaq Stock Market, NDAQ which incorporated the orders placed immediately after Business Wire and other news services distributed Ulta's earnings, according to data analyzed by Nanex LLC, a market-data provider, and people familiar with the trading. Stocks often settle a few tenths of a second after 4 p.m. as Nasdaq's computer systems seek to reconcile all trades.

Such delays between the time Business Wire distributes releases and when wire services send them to the public are standard. Market experts say it typically takes from a hundred milliseconds to several seconds between the time news wires receive a news release and when it is published.

Market volatility in the seconds after the 4 p.m. Eastern time stock-market close has increased in recent years as high-speed firms race to trade on market-moving information such as earnings reports, which are often released immediately after the closing bell, according to Eric Hunsader, founder of Nanex. Swings of at least 0.3% in Nasdaq stocks within the first second after 4 p.m. rose about 30% in the two years ended Dec. 31, 2013, from the previous two years, according to Nanex data.

The ability of high-speed firms to trade on market-moving news before other investors highlights how gaining an edge in today's lightning-fast markets can come down to a split-second advantage. It also shows how trading fueled by state-of-the art computers and communication networks is challenging regulators whose rules were largely carved out in an era dominated by human traders.

The Securities and Exchange Commission's fair-disclosure rule, Regulation FD, requires that public companies issue material information about their businesses to the broader public at the same time it is disclosed to market professionals. The SEC passed the rule in 2000 amid concerns that companies were selectively revealing material information to Wall Street analysts and certain privileged investors. The rule, written before the era of high-speed trading, doesn't address whether fractions of a second matter in terms of when information is distributed.

While public companies use news-release distributors such as Business Wire to help fulfill their disclosure obligations, the distributors aren't directly overseen by the SEC.

Marketwired says it provides clients with "a service that enables them to comply with their Reg FD and associated regulations, which require full and fair simultaneous disclosure of information."

Business Wire's competitor, PR Newswire, says it doesn't provide trading firms access to its "Disclosure Feed" despite frequent requests. The company says it provides the news feed to clients with the understanding that information provided won't be used for trading purposes.

"Though it might be a 'wish-list item' for many, we don't supply the Disclosure Feed to any stock trading portal, high speed or otherwise," said Bradley Smith, director of marketing at PR Newswire, a unit of U.K. media company UBM UBM.LN PLC.

Business Wire's clients include Chicago's Chopper Trading LLC and Spano Trading LLC, a Miami Beach, Fla., high-speed trader. Chopper Trading declined to comment.

Public companies typically post releases on their websites at roughly the same time the information is distributed to Business Wire clients. While anyone can grab that data from a company's website, traders say getting the information through a direct feed is faster.

Joseph Spano, founder of Spano Trading, said an advantage of subscribing to Business Wire is that news releases are "pushed" to his firm's computers, which he said is much faster and more reliable than getting the data from a company's website. "The faster you want the data, the more it costs," he said in an email. "I guess this is capitalism."