High Frequency Trading Technology: A TABB Anthology

We are all keenly aware that electronic routing and execution has become the mechanism by which our capital markets operate. Algorithms account for more than 25% of all shares traded by the buy side today—a number steadily rising for several years now. However, the incredible capabilities offered by technology have given meteoric rise to a relatively few high frequency proprietary trading firms that now wield far greater influence on the markets today than most people recognize.

Strategies that optimize the value of high frequency algorithmic trading are highly dependent on ultra-low latency. The right decisions are based on flowing information into your algorithm microseconds sooner than your competitors. To realize any real benefit from implementing these strategies, a trading firm must have a real-time, co-located, high-frequency trading platform—one where data is collected, and orders are created and routed to execution venues in sub-millisecond times.

The key to understanding the term “low latency” is knowing that it can mean different things to different asset classes and can shift at each stage of the trading process. Options are not equities, and pricing analytics are not quote engines; the two shouldn’t be measured on the same scale. Case in point: Whereas most of the focus for reducing latency is on order execution in the equities markets, the options world presents a different story.

There are four core steps in the investment strategy process that are independent whether or not the strategy is automated, manual, or somewhere in between: Data management, Alpha discovery, Alpha capture and Feedback loop. Each phase has its own set of market data and analytics and includes major opportunities and challenges.

Data rates will not stop growing and latency will not stop dropping. As we work our way out of the last few years and into a new world of trading and investment banking, financial firms will need innovative technology more than ever in order to remain competitive and win. Tools are critical, but it is the approach that must be well understood: After all, software cannot be developed and improved upon unless we grasp exactly where and how it will run.

The TABB Group Anthology on High Frequency Trading Technology is a 67 page collection of previously published TABB Group content focused on the business and technology issues facing US equity and options trading. The perspectives include Robert Iati on the alleged code theft of Goldman Sachs proprietary trading software, Miranda Mizen on flash trading, Laurie Berke on Sponsored Access and Larry Tabb on US equity market structure. Also included are all three pieces on low-latency trading authored by Kevin McPartland.