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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September 9, 2009

Word For Word

By Editorial Staff

Donal Byrne is chief executive of Corvil, a Dublin, Ireland-based maker of latency management tools. Byrne says monitoring latency works best when it involves the entire trade processing chain, including the systems of traders, service providers and market centers.

 

On high-frequency trading--

The trading industry has always leveraged technology. Those who have leveraged technology successfully have tended to gain market share, increase profits and grow their business. I don't think we should look at high-frequency trading as something that is very different, or Machiavellian, where people suspect there is an ulterior motive at play here.

 

On the quality of high-frequency trading liquidity--

The new breed of market makers--the high-frequency, the automated market makers--are now playing a critical role in most liquidity destinations, in that they do provide greater sources of liquidity. They are now an integral part of making the markets work. And without them, there wouldn't be as much liquidity out there.

 

On co-location--

The predominant benefit and reason people co-locate is to reduce their latency on the assumption that latency is dominated by geographical distance. Now, we have quite often shown that's not always the dominant factor in latency. When it's the dominant factor, then co-location can reduce your latency, and therefore, is likely to improve your trading strategy--if it's a high-frequency or latency-dependent trading strategy.

Donal Byrne, Corvil

However, it comes at a price. And the trade-off is that many people in the high-frequency game are now trading at two or multiple liquidity destinations, or execution venues. And when you have regulations that require you to check the best price on everything before you execute, you have to really check the price coming from every single venue, which can become quite expensive once you get into a large number of venues that you're trading across. Many times when people co-locate they remove the geographical limitations. But they're still left with latencies as things slow down during higher levels of traffic in peak times.

 

On unequal latencies at market centers--

Our firsthand experience shows that some exchanges are "fast" and some exchanges are "slow." Some "fast" exchanges are sometimes slow, and some "slow" exchanges are not as slow as people think. So there is a lot of uncertainty from traders on who is really fast, when they are fast and who is slow. The high-frequency trading game is one of relative speed, not absolute speed. So, what traders really need to understand is the likelihood that they can trade faster at a given exchange relative to their competitors. The advantage that a fast exchange brings to a trader with the latest low-latency technology is that the total speed differential is relatively larger. Therefore, the relative advantage is larger. Contrast this with a slow exchange where, irrespective of how fast a trader can react, the relative speed advantage is marginal for the trading strategy to succeed.

 

 

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