What Is High Frequency Trading and What’s the Best Software?

Do you have high frequency trading software? Everybody loves the Flash. The show has been on for 7 seasons now with no signs of stopping. As children, we used to dream of having super powers. For a lot of us having Flash’s super speed was in the top 3 powers; if not at the top of the list. We’re still decades if not centuries away from replicating that kind of speed in our lives.

However, one place where it does occur on a day to day basis however is the stock market. What if I told you that there was a way to enter and exit a trade in less than a second? Or a way to even track what these speedsters are up to?

Where profits and losses are decided in milliseconds and microseconds. And just 1 millisecond faster can mean the difference between millions of dollars a day and absolutely crippling losses? Welcome to the world of High Frequency Trading also known as HFT.

What Is High Frequency Trading Software?

  • High frequency trading software s something that can be extremely helpful to a trader. The faster things go with trading, the better. That goes for order fills, charts, scans, and trading computers. We as humans aren’t as fast as a HFT software would be.

Algorithm Trading

High Frequency Trading Software Meme

HFT is a form of algorithm trading but with high speeds, high churn and massive number of successful transactions. It’s the use of complex algorithms and computer tools to execute trades rapidly. High frequency trading software makes it occur within a matter of seconds. Or sometimes in a fraction of seconds. Its origins can be traced back to the time telegraph. Which was introduced in the early 1900s.

Traders standing in pits in one exchange would use high speed telegraph services to manage positions in other exchanges. Information flow moved very slowly in those times and this provided a distinct advantage. Let’s try to understand this with an example.

How Do Oranges Compare to High Frequency Trading Software?

Let’s consider oranges and frozen concentrated orange futures. Oranges in USA grow primarily in Florida during winter time. One winter, the temperatures soared, leading to a failure in orange crop.

This caused the price of frozen concentrated orange futures to shoot up. This was due to reduced supply and constant demand. A trader operating in Florida would be aware of this crop failure.

However, those operating in California will not. In fact, they won’t know until news reaches him or her via newspaper or other channels.

In such a scenario, a Florida trader may use a high speed telegraph network to take a position in a California exchange at a much lower price. Then benefit from the price rise that’ll occur once news reaches that area.

While the world has moved on to electronic trading and near instant execution, this exact scenario is still repeated via HFT today. But on a time frame beyond the comprehension of human beings. Hence high frequency trading software.

HFT in Modern Times

HFTs Buying Stocks

So what does high frequency trading software mean in modern times? Data moves at literally the speed of light geared towards reducing the distances in order to beat the others to the exchange. So how legal HFT firms work is basically trying to front run large orders by funds and institutions. They do this legally by observing market quotes and order flow.

The computer algorithm tracks order flow. And on seeing patterns of a large order flow coming in, front runs it with its own orders first.

This is a highly simplified version of what actually happens. In essence, if you’re an HFT firm, you have to get your orders first before the fund gets it in the market.

What Is High Frequency Trading Algorithm?

  • High frequency trading software is an extension of algos like Flowtrade. It allows small trades to be filled at lightening fast speed. Like Flash. Trades being filled within milliseconds sounds like a great thing to me! Especially if you’ve had an experience with slow order fills.

Electric Signals

What does high frequency trading software mean with electric signals? Since all electric signals move at the same speed, the only edge one has is to reduce distance. As a result, one gets that small millisecond or microsecond advantage.

One way to do that is colocation. Colocation means placing your own servers next to the exchange’s data servers for a fee. This allows HFT firms to access market information a fraction of a second earlier than the common public; enough time on HFT timeframe to make a successful trade.

Another way of reducing distance is by laying down lease lines between exchange servers and data centers in as straight a line as possible.

In the excellent but hitherto unknown movie “The Hummingbird Project” based on a real life story, the lead character (played by Jesse Eisenberg) is working on a project that would lay down a fiber optic cable in a straight line from Kansas city exchange to New York Stock Exchange in order to reduce latency time to 16 milliseconds from 17 milliseconds.

They have to lay it in a straight line. Which involves passing through swamps, mountains, rivers, residential and commercial properties and millions of dollars of outlay, All to reduce 1 millisecond.

Is High Frequency Trading Software Legal?

HFT Trading Meme

Is high frequency trading software legal? Yes. And while it’s legal since the firms operate on publicly available data, this still seems unfair to the public leading to a hue and cry.

However what has accelerated the hue and cry is unscrupulous behavior by some HFT firms spoiling the names of the rest. A lot of HFT firms work as market making firms. Market making is where a maker provides both the bids (Buy orders) and offers (Sell orders) and makes money from the spread (difference between buy order price and sell order price).

However the overzealous activity of some can lead to a flash crash along the lines of what occurred in 2010. In 2010, a futures trader Navinder Sarao triggered a crash of 1000 points in Dow in 10 minutes causing over one trillion dollars to evaporate and some blue chip companies traded for less than a penny.

Till today that fear prevails. A fear that HFT firms will cause a flash crash. Another aspect practiced by HFT firms which is illegal is quote stuffing.

It involves entering and withdrawing a huge number of orders flooding the market and creating confusion allowing for HFT firms to profit from that confusion.

High Frequency Trading Software and Volatility

High frequency trading software has also been instrumental in increasing the volatility of the markets. Smooth trending markets are now choppy all along.

With increasing volume and presence of HFT, today about 50% of all trading in US markets is done by HFT firms. So while the volatility might be a bit different from what one is used to, one thing is for sure HFT firms are here to stay.

So how can we as retail traders participate in this HFT? It is difficult but with some effort and time we can sift out the wheat from the chaff.

So let’s begin with first clearing all doubts on the cost of true HFT software. It’s in hundreds of thousands dollars to millions of dollars.

Most HFT firms have their own proprietary software developed in house along with necessary infrastructure like advanced computers, leased lines, datacenter fees etc.

The software also requires constant maintenance and up gradation as it becomes outdated or slower or a newer faster one comes in the market. Codes are made leaner and more efficient and every millisecond shaved off gives a distinct advantage.

The Cost

With all the expenses and costs factored in and with the potential of making millions of dollars every day, the question we as retail traders must ask why would anyone be selling you HFT software for few hundreds or few thousands of dollars?

The answer is they’re not. Most of those claiming to be HFT software are fraudulent or not truly HFT but simple algorithms trading based on various indicators or strategies.

Most of these strategies will work in a backtest but will not work in live markets because if they worked, why the heck would they sell it to you and diminish their edge.

For an HFT firm, the edge is in milliseconds and lies in being able to execute the order first and ahead of others. If they start providing the same to retail traders, there will be crowding and the edge of being the first is lost.

So take 99% of those that sell you HFT software with a pinch of salt and dig deeper in what they are offering.

Providers

That being said however, there are some genuine providers out there that can provide a resemblance of HFT systems, i.e. the software will track bursts of activity, large market participants based on quote movements, market maker activity, dark pools etc.

Flowtrade.com comes to mind as one of the top providers of algorithmic tracking software built by market makers and available for retail traders. The software doesn’t execute your trades for you, but rather lets you “see” what these programs are doing. Are they subtly buying when price is dropping? Or selling the highs? There is a way to see beyond the price now.

Like all major software solutions today, this one too is packaged as Software as a Solution (SaaS) and comes with a reasonable price which is tailored more towards traders who already know how to trade, but just want to trade better. There is also a free trial so you can see it in action.

There are those that track activity by HFT firms as well as by large market participants and that includes HFT Alert on Twitter.

There are also firms like lightspeed, inforeachinc, argo software engineering, blue rose technologies etc. that will help design APIs and software for you as well as rent out their infrastructure for your use and can be explored.

Conclusion

HFT, the name itself invokes awe and admiration, a feeling of dealing with the technology of the future. The ability to control things at the speed of light is what we all desire and we can do just that at least in out trading.

Who wouldn’t want to be moving in front of the big whales instead of behind them? HFT allows you to do just that. However, there are plenty of misleading providers out there and one had better tread carefully lest one get sucked in on the wrong provider.

As technology advances and prices come down, the playing field gets levelled and it won’t be long before we as retail traders rub shoulders with the institutions and giants in the field.

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