HIGH-FREQUENCY TRADING (part 1 )

It is important to realize that a large and increasing part of the daily stock, futures, exchange-traded fund, currency, commodity, and options volume is being executed by high-frequency trading (HFT) firms that have algorithms designed by quantitative analysts called quants. 



Most of the programmers have master's degrees or PhDs in mathematics, quantitative analysis, engineering, programming, or physics, and the best ones make a $1 million a year for their efforts. Some algorithms hold positions for a fraction of a second, and others for an hour or two. Every imaginable strategy is used, including models based on complex financial analysis of huge volumes of data, to simple statistical aberrations. Every idea has to have sound logic, and back-testing has to confirm that it is effective. Some programmers tweak their programs during the day to give them an edge for the next few hours.



Many programs operate in the world of nanoseconds (a billionth of a second), and every advance in hardware and software that reduces the latency between receiving data and getting orders filled is employed. The fastest programming languages and operating systems are also used to reduce the latency. Since their edge is very small and hundreds of millions of dollars are at stake, HFT firms tend to be secretive, stealthy, and filled with smart people.


CBS's 60 Minutes ran a story on HFT in October 2010 and reported that as much as 70 percent of the volume and over a billion shares of stock daily were being traded by HFT programs. This is somewhat misleading because the HFT firms are only part of the algorithm trading world. There are other programs that are designed for longerterm trading and are also part of that 70 percent. Both the instantaneous high-frequency trading software and the longer-term program trading software are created by quantitative analysts. These quants are mathematicians, and the ones who design the HFT programs care nothing about charts or fundamentals and are interested only in short-term market tendencies based on statistical analysis. Most of them don't even care about 5 minute charts, and their trading has nothing to do with whatever chart you are watching during the day.