Inside the offices of Tradeworx, an emerging player in the secretive and controversial world of high-frequency trading, it’s dead quiet as staffers pore over the “tape,” financial industry speak for the record of the day’s transactions.
Many of the firm’s 30 employees are not yet 25. They were hired straight from college to ensure their thinking and work habits are untainted. Now they’re making Wall Street’s latest fortune, a fraction of a penny at a time.
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Jaap Steinvoorte
Wall Street
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The only clue that Tradeworx, a six-year-old hedge fund based in Red Bank, New Jersey, is a financial outfit at all are two giant screens that break up the monotony of white walls and grayish carpets.
The physics and computer science graduates are crafting complex computer codes to exploit trading patterns revealed by the tape.
Tradeworx and other firms like it use such algorithms in the lightning-quick trading approach that is altering the landscape of U.S. markets, driving broker-dealers out of business and changing how money managers invest.
High-frequency trading now accounts for 60 percent of total U.S. equity volume, and is spreading overseas and into other markets. These traders stand ready to buy and sell shares at all times, providing the liquidity that keeps markets moving.
As a result, trading is now cheaper and easier than ever.
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Yet critics worry fast trading may undermine the integrity of the U.S. equity market, a bastion of capitalism and corporate America, and could even spark another financial crisis.
They also complain about the money high-frequency firms are making—and how they are making it. During last year’s plunge, when volatility rose, many high-frequency traders earned 10 times their usual profits, executives at several of the proprietary firms told Reuters.
For their part, the fast traders don’t see what all the fuss is about.
“We live in a capitalist society,” said Tradeworx Chief Executive Manoj Narang, 40, wearing jeans, runners and a Yankees baseball cap.
“People should expect and be willing to pay a price for the liquidity that they get. No one should expect that a provider of liquidity is just going to stand there while you bulldoze them into submission,” Narang said.
Tradeworx started high-frequency trading in January and now accounts for about 3 percent of overall volume in the exchange-traded fund SPDR Trust, which tracks the Standard & Poor’s 500 Index and is one of the most heavily traded securities.
High-frequency traders point to last year’s steep sell-off as proof of their value in helping the market run smoothly.
While over-the-counter and other markets seized up, exacerbating the worst financial crisis since the Great Depression, fast traders continued to buy and sell shares. Proponents also laud computerized trading for eliminating the shady transactions that often occurred in the past when people were directly involved in trading.
Tape Holds Answers to Debate
Trading today seems less intimate, less human, married as it is to computer code. The revolution has caught some people off guard, and has led to deep concerns.
Many institutional money managers are uneasy about how the fast traders anticipate their transactions, and worry that there might be information leakage about their trading intentions—a critical issue for asset managers.
“High-frequency trading, fundamentally, when you look at what their algorithms are finding, they’re almost a structured way of trying to front-run,” said Jim McCaughan, chief executive of the asset management arm of Principal Financial Group, where he oversees about $215 billion in assets.
“That just seems to me ultimately as doing it at the expense of other investors,” he said.
McCaughan said he had no proof of wrongdoing, yet he suspected it is quite likely the leaking of information may have happened. “If it has, it would at best be unfair to other investors and perhaps criminal,” he said.
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Photo: Oliver Quillia for CNBC.com
New York Stock Exchange
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A furor over the extent of computerized trading erupted this summer when news of the enormous profits being garnered rankled a public already apprehensive about a crisis rooted in Wall Street—whose bailout the taxpayer is footing.
Critics fear an errant computer code, similar to the program trading behind the Black Monday crash of 1987, could engender another deep market plunge.
The U.S. Securities and Exchange Commission is taking months to investigate all this. With high-frequency trading spreading quickly from its U.S. equity base, the regulator’s response will be crucial for capital markets around the world.
Key to any discussion of high-frequency trading is the tape, which records the price, time, size and order of trades.
It’s the day’s financial narrative, and its availability is held up as a major reason why the U.S. equity markets are trusted for their transparency and fairness.
The tape is also highly prized by traders, who base their computer instructions, called algorithms, on this data. The Nasdaq Stock Market produces about 50 gigabytes of information every day, which is measured in nanoseconds—or a billionth of a second.
Lotus Capital Management of New York earlier this year realized that a competitor was beating it to a trade it had programmed by exactly 3 microseconds, day after day. The loss meant Lotus was forfeiting about $1,000 in daily revenue on that particular trading strategy.
Lotus, a quantitative trading firm that uses high-frequency strategies, invested and tinkered, eventually shaving five microseconds from the router and two microseconds from the execution server.
“By just reading the tape you can see a lot of what the other guys are doing. You can see who is successful. So eventually everyone is operating more or less the same strategy,” said Louis Liu, the 37-year-old founder of Lotus.
December 3, 2009
MyAnatrader
MyAnatrader 
1 responses to “High frequency trading”
idkitana
December 3rd, 2009 at 08:01
Definition :
Algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of computer programs for entering trading orders with the computer algorithm deciding on aspects of the order such as the timing, price, or quantity of the order, or in many cases initiating the order without human intervention.
Wikipedia quote:
“The downside with these systems is their black box-ness,” Mr. Williams said. “Traders have intuitive senses of how the world works. But with these systems you pour in a bunch of numbers, and something comes out the other end, and it’s not always intuitive or clear why the black box latched onto certain data or relationships.”
I tend to concur with him about robotic trading.