1.0 High Frequency Trading 1.1 What is High Frequency Trading High frequency trading is a form of automated trading that uses super computers to transact or process mega transaction orders at super fast speed, which are mostly measured in microsecond or milliseconds. ( Investopedia, n.d) with the aim to identify and arbitrage temporary market inefficiencies that are created by the competing interests of market participants (Aldridge,2013) Algorithms, low latency technology, high message rates and high speed connections are the 4 main characteristics in the performance of a High Frequency Trading. Algorithms is a set of instructions for accomplishing a given task. So a trading algorithm is just a computerized model with steps to trade an order in a specific way (Johnson, 2010) The algorithms in HFT are for the purpose of decision making, order initiation, generation, routing or execution for each individual transaction without a human execution. (Aldridge, 2013) The low latency technology infrastructure on the other hand is a must for high frequency trading. This infrastructure is designed to minimize response times, including its proximity and co-location services which thus improves the execution speed (Cisco, 2014) Therefore, computers play an very important role in replacing slow humans in the trading decisions. Next on is the high message rates and speed connections in HFT which relates to the response speed for market order entry , orders quotation and speed for cancellation. 1.2 High Frequency Trader’s Strategies High Frequency Traders uses various strategy when performing HFT in the market. Such as for arbitrage strategies, directional event based strategies, automated market trading and liquidity detecti... ... middle of paper ... ...[Accessed: 6 Apr 2014]. Tabb Group; Rosenblatt Securities. 2014. Declining US High frequency trading. [image online] Available at: http://www.nytimes.com/interactive/2012/10/15/business/Declining-US-High-Frequency-Trading.html?ref=highfrequencyalgorithmictrading&_r=0 [Accessed: 10 Apr 2014]. Touryalai,H,2014. NY AG’s New Crackdown Targets High Frequency Trading. [online] Available at: http://www.forbes.com/sites/halahtouryalai/2014/03/18/ny-ags-new-crackdown-targets-high-frequency-trading/ [Accesed:25 March 2014] Wagner, R. and Tan Bhala, K. 2011. High Frequency Trading - Financial Ethics - Seven Pillars Institute. [online] Available at: http://sevenpillarsinstitute.org/case-studies/high-frequency-trading [Accessed: 8 Apr 2014]. Wikipedia.2014. 2010 Flash Crash. [online] Available at: http://en.wikipedia.org/wiki/2010_Flash_Crash [Accessed: 23 March 2014]
The new stock market, however, has replaced the human element with technological ability As per my research on Flash Boys it was interesting to find one to enlighten us with exposure on HFT. Getting ahead with HFT .It is a firms widely spread network which was secretly laid for about an 827-mile fiber optic cable connecting Chicago and Northern New Jersey in the straightest line possible. The workers, who were told to keep quiet and avoid asking questions of their employer,
...is manual is to teach you to trade like a Stud Trader. Somewhat humorously and cynically the common characteristics of traders are discussed such as:
Mutual funds can be bought or sold based on that day’s closing price. ETFs can be bought or sold intraday, you can rapidly enter and leave the market throughout the trading day. This offer investors the chance to wager on the direction short-term market movements – daily fluctuations of securities.
The speed in which trading is being done is faster than a blink of an eye. Front runners are making trades before most traders are even aware that the market is open. It is all done in a split of a second and millions of dollars worth too. Traders have been waiting forever to be able to trade at large volumes in an instant. This is what they now have with services such as HFT and EFTs. The stock market is a place where people can make millions, if they have the money to begin with
It all started in the 1970s when the Chicago Mercantile Exchange allowed large retail traders to auto trade contracts over computer systems. That system was the lone type of computerized auto trading software until 1999 when internet companies created the retail forex platforms that were dedicated to individuals. These computer systems let people instantaneously buy and sell currencies on the forex market. Today there are companies like Wealthfront and Betterment that use the money you provide and place you in funds that give you a certain amount of risk based on the questions you answer when you sign up. There is also another new entrant to the market called Acorns that has similar functionality to Wealthfront and Betterment but it is solely and app based company which gives the company a marketing edge for millennial investors. Another new start-up in this market is SigFig which gives the clients the best parts of both financial robot algorithm trading and human expertise to make the client have better returns over the long-term. All of these new entrants in the marketplace have a similar structure, however the fees that they charge are much less than traditional investment firms because of having to hire less human capital to
It is also unethical for SG to ignore the abnormally high trading volume of JK until it became a serious problem. SG is also one of the fiduciaries in handling the clients’ resources for their best interests. However, Kerviel revealed in his book that his practice was common among traders in SG but the senior management did not carry out actions to prohibit it (Kerviel, 2010). This shows that SG probably aimed at earning the largest profits for the shareholders by ignoring the potential risks ...
The efficient market hypothesis has been one of the main topics of academic finance research. The efficient market hypotheses also know as the joint hypothesis problem, asserts that financial markets lack solid hard information in making decisions. Efficient market hypothesis claims it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information . According to efficient market hypothesis stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments . In reality once cannot always achieve returns in excess of average market return on a risk-adjusted basis. They have been numerous arguments against the efficient market hypothesis. Some researches point out the fact financial theories are subjective, in other words they are ideas that try to explain how markets work and behave.
Pagnotta, E & Philippon, T. (2010). The Welfare Effects of Financial Innovation: High Frequency Trading in Equity Markets. Available: https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=SED2011&paper_id=1246. Last accessed 04/12/11.
... etc. to customers and interact with them in real time, which can greatly impact customer loyalty. Again, time reductions represent a powerful benefit, and they are projected to increase with the continuous advancement of processing capabilities.
A new day on Wall Street. The Internet is changing the way the brokerage industry does business. Today more and more investors are electing to trade via the Internet and avoid contact with a broker all together. Are the days of the large full service broker over or will there be a compromise between full service and self-direction? Has the rapid advancement in information technology helped the brokerage industry or hurt it? What role will IT have on the future of trading? Just a few years ago all trades were done by calling a brokerage and talking to a broker who usually tried to push some hot stock and charged you a large sum to purchase the shares you wanted. The 70’s gave way to a new era of discount brokers. The discount brokers provided the means to make trades at a significantly lower cost but at the expense of less informative and directed services. These discount firms utilized new computer technologies to process trades and opened up investment opportunities for many that would not have previously considered purchasing securities. With improved IT capabilities and the introduction of the Internet the discount brokers were able to open the door even further by reducing trading costs and developing user friendly platforms for investors. The Brokerage industry is one driven by quality customer service and high profits. Investors want to maximize there investments at a reduced cost but still receive the highest level of service and information available. In the past investors were restricted by the amount of control they had over their investments, brokers made recommendation, pushes, and did the actual purchasing. Today with the addition of the PC and online capabilities investors can choose what, where and when they invest. By utilizing online resources investors can perform the research and analysis that was once primarily done by brokers. This new technology is having a dramatic effect on the way brokerages operate. The once small discount brokers are utilizing the Internet to take over a whole new market segment and the larger full service brokerage companies are rallying to add online services. This paper will explore these effects and how the industry is responding as well as address the questions raised in the opening. Selling securities via the Internet is easy and fast. Brokerage firms are offering their services on the Internet and this is reshaping the industry.
The National Association of Securities Dealers Automated Quotations (NASDAQ) and the New York Stock Exchange (NYSE) are two of the largest and most known stock exchanges across the globe. Both of these stock exchanges handles and mediates the trade, sale, and purchasing of different stocks, bonds, and securities. While both of these stock exchanges have their own unique methods and forms of purchasing and selling stocks, they both serve the same purpose and function, which is a marketplace for the sales of stocks.
The basic theory describes the information efficiency of the market is the Efficient Markets Hypothesis (EMH). The information efficiently is classified according to how fast and accurate security prices react to new information, in such a way that nobody be able to get abnormal return. All information can be divided into three types: past information, public available information and all information. In accordance with the Fama’s c...
For investing specialists, technology provides operational capability for handling more stocks and greatly increased volumes of trading. Specialists can follow additional sources of market information, and multiple trading and post-trade functions, all on “one screen” at work or at home. They are also given interfaces to “upstairs” risk-management systems. They also have flexiblity to rearrange their physical workspaces, terminals and functional activities.
...ven Markets: Efficient Execution", in Proceedings of IEEE Conference on Electronic Commerce, Munich, Germany, July 19-22, 2005.
In the course of years of stock market study, two quite distinct schools of thought have arisen, two radically different methods of arriving at the answers to the trader’s problem of what and when. In the street jargon, one of these is commonly referred to as the fundamental analysis or statistical, and the other as the technical. The term technical in its application to the stock market has come to have a special meaning. It refers to the study of the action of the market itself as opposed to the study of goods in which the market deals. Technical analysis is the science of recording, usually in graphic form, the actual history of trading (price changes, volumes, and transactions, etc) in a certain stock or in “the averages” and then deducing from that pictured history the probable future trend. According to Park and Irwin (2007) recent studies indicate that technical trading strategies consistently produce economic profits in a range of speculative markets at least until the early 1990s. From a total of 95 recent studies, 56 studies find positive results regarding technical trading strategies, 20 studies obtained negative results, and 19 studies indicate mixed results.