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HFT

High Frequency Trading
by

Jichuan Feng

on 13 February 2014

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Transcript of HFT

Timeline
APPEL NASDAQ'S Quotes
2013
1980s
2008
2010
0
+
-
=
9
8
7
1
2
3
4
5
6
c
Debate
Who are High Frequency Traders ?
Propriety trade firms
Market makers specialist (spread)
Quantitative hedge funds
Investment banks
Key Words
Proprietary trading (also "prop trading" or PPT) occurs when a firm trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments, with the firm's own money as opposed to its customers' money, so as to make a profit for itself.
High Frequency Trading
Disadvantages
what is High Frequency Trading?
Characteristics
algorithmic trading!
Flash Crash 6 may 2010
immense profitability
Jim Simons, investment manager of Renaissance Technologies earned $ 2.5 billion alone in 2008
separated from low frequency trading (traditional)
Traditional trading model (manual fashion)
computer-generated
very fast (sub millisecond) execution
very high throughput of order and trades
short holding period
Advantages
increased market efficiency
Added liquidity
Innovation in computer technology
Stabilization of market systems
HFT in which kinds of Assets?
revolution IT
Client
sales
representative
phone
telegraph
trading representative
brokers and exchange
slow
error-prone
expensive
1st electronic dealing systems
not the same thing
algorithmic trading is where computer algorithms generate or manage orders
High Frequency Trading is subset algo trading
co-location strategies
Debate
9:31:00.00 A.M
Investor submits
order
0.0
SECONDS
A slow-moved mutual fund submits an order to purchase

10000 shares of APPLE

100 blocs X 100 shares

with a Max Price of $455.40
0.1s
0.3s
0.4s
0.5s
$455.20
9:31:00.01-9:31:00.03 A.M
High Frequency Traders
Get to "Flash orders"
Before that order is sent to the broad marketplace,
it is routed to high-frequency traders for 30 milliseconds who gets a valuable insight
9:31:00.05
HFT Buy
The high-frequency traders,
knowing that an order is coming,
flood the market with buy orders,
scooping up all available shares
of APPEL at 455.20
Resell to investor
HFT Investor
$455.25 Yes
$455.28 Yes
$455.50 No
...... ...
$455.39 Max
But HFT cancel orders in milliseconds!
Automatic algorithms
Almost all shares of APPEL
are sold at $455.39
Irene
Joe
No transparency
flash orders - front running
add volatility to the market
Not fair for low traders
Definition of algorithm
noun
a process or set of rules to be followed in calculations or other problem-solving operations, especially by a computer
The events on May 6, 2010:The so-called Flash Crash was a brief period of extreme market volatility on May 6, 2010. That day, the Dow Jones Industrial Average (DJIA) fell by
998.5
points within seconds, which marks the biggest one-day decline on an intraday basis in the history of DJIA stock index.
2000
0.03s
Full transcript