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text Courtesy Of Wikipedia
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. 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 to obtain sub-microsecond end-to-end Market data processing.High-frequency trading (HFT) is the use of sophisticated technological tools to trade securities like stocks or options, and is typically characterized by several distinguishing features:[1][2][3]
It is highly quantitative, employing computerized algorithms to analyze incoming market data and implement proprietary trading strategies;
An investment position is held only for very brief periods of time - from seconds to hours - and rapidly trades into and out of those positions, sometimes thousands or tens of thousands of times a day;[4]
At the end of a trading day there is no net investment position;
It is mostly employed by proprietary firms or on proprietary trading desks in larger, diversified firms;
It is very sensitive to the processing speed of markets and of their own access to the market;
Many high-frequency traders provide liquidity and price discovery to the markets through market-making and arbitrage trading; high-frequency traders also take liquidity to manage risk or lock in profits.
Positions are taken in equities, options, futures, ETFs, currencies, and other financial instruments that can be traded electronically.[5]
High-frequency traders compete on a basis of speed with other high-frequency traders, not long-term investors (who typically look for opportunities over a period of weeks, months, or years), and compete for very small, consistent profits.[6][7] As a result, high-frequency trading has been shown to have a potential Sharpe ratio (measure of reward per unit of risk) thousands of times higher than the traditional buy-and-hold strategies.[8]
Aiming to capture just a fraction of a penny per share or currency unit on every trade, high-frequency traders move in and out of such short-term positions several times each day. Fractions of a penny accumulate fast to produce significantly positive results at the end of every day.[2] High-frequency trading firms do not employ significant leverage, do not accumulate positions, and typically liquidate their entire portfolios on a daily basis.[7]
By 2010 high-frequency trading accounted for over 70% of equity trades in the US and was rapidly growing in popularity in Europe and Asia.
Algorithmic and high-frequency trading were both found to have contributed to volatility in the May 6, 2010 Flash Crash, when high-frequency liquidity providers were in fact found to have withdrawn from the market.[9][10][11][12][13][14][15][16] A July, 2011 report by the International Organization of Securities Commissions (IOSCO), an international body of securities regulators, concluded that while "algorithms and HFT technology have been used by market participants to manage their trading and risk, their usage was also clearly a contributing factor in the flash crash event of May 6, 2010."[1][17]
