Commentary

Tim Quast
Traders Magazine Online News

We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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February 1, 2004

A Special Black Box Trader?

By Peter Chapman

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  • A Special Black Box Trader?

Playing the Auto-Trading Game for the Mass Market

An up-and-coming vendor is hoping to tap into the burgeoning demand for automated trading.

Radial Systems, a two-man operation based in New York, is courting day traders, hedge funds, traditional asset managers and traditional broker dealers with a system that automates traders' strategies.

"We have developed a platform that enables us to take an algorithm or strategy and execute it automatically," explained Radial's Daniel Azoulay. "The system then manages the trade, manages the risk."

Auto-trading, also known as Black Box trading, is sweeping Wall Street at all levels. Day trading firms, bulge bracket prop desks, electronic desks, market makers, and electronic agency brokers are all turning to computers to trade their own books as well as client orders.

With the tremendous increase in the number of ticks and the flattening of spreads since the advent of decimalization, trading profitably has become much more difficult for the lone human. Auto-trading makes it possible for a single trader to analyze more data and handle more names. That allows his firm to keep costs down and/or make more money.

Auto-trading has traditionally been the milieu of sophisticated brokerages - big and small - trading for their own accounts and those of quantitatively-driven money managers. Bulge bracket firms employ Black Boxes on their prop desks. Proprietary day trading shops such as ATD and Tradebot/ Northtown auto-trade on ECNs. Highly sophisticated electronic agency brokerages such as Investment Technology Group push auto-trading out to their quant customers.

With the advent of decimalization, large market makers started deploying the technology in their Nasdaq dealing rooms to handle more symbols with fewer traders. Also, bulge bracket shops such as Morgan Stanley, CSFB, and Goldman Sachs set up electronic desks to facilitate their customers' simpler trades with automated algorithms.

In the past two years, auto-trading has spread to the broader market. In February 2002, market data filtering vendor Neovest added auto-trading to its line-up. "Due to the technology's ability to literally automate and execute tens of thousands of trades per hour," the company announced at the time, "the code was subjected to the most rigorous beta testing of any product feature in Neovest history."

Bruce Byers, president of Neovest, then went on to gush: "This technology will change the landscape of trading as we know it."

A year later, award-winning front-end developer and direct access brokerage TradeStation Securities released Version 7.0 of its TradeStation trading system, giving its day trader customers automated trading for the first time.

Mundane and Esoteric

Last summer, the proprietary day trading house Echo Trade, a unit of Chicago clearing firm Pax Clearing, introduced Predator Pro. The system purports to automate strategies both mundane and esoteric: opening orders, envelopes, baskets, gap finding, auto-gap entries, spreads, pairs and sector trading. Traders can use canned strategies or load their own. Once done, they can "sit back and let the computer trade for them," according to Echo.