What really is High Frequency Trading and who should feel threatened by it?
** DRAFT **
The general understanding most investors expose about HFT algorithms seems to be rooted much more on mystical and fashioned beliefs than on good reasoning. On this article we'll investigate what-is-what and who-is-who, on the point of view of the software engineering involved.
Let's start by inspecting who uses High Frequency Trading nowadays. After we remind ourselves of the distinction between High Frequency Trading and Fast Trading, a quick cases study reveal that HFT is preferred by big banks and other wealthy financial institutions who are willing to spend lots of money with hardware and infrastructure -- because, remember, for HFT Algorithms, even a µs gain in latency is a competitive advantage.
Just by gasping the previous statement we might infer that the competition is among the ones also disputing improvements on the µs range -- but lets not dig into that by now.
Lets inspect the software they want to operate on their wonderful infrastructure. And we'll start on the developers of these algorithms -- or better yet, on the environment capable of nurturing these developers, providing them with what to breathe and eat.
Big financial institutions are often very conservative on what they have to offer to their employees: apart from the satisfaction of working on a rather rigid hierarchy, strongly political environment and the agony of not having a clear nor noble mission to accomplish from the wearing out of many of their precious neurons, they also offer a salary. Some might argue that there is some personal status or a certain level of stability involved. Who matters about that?
I intent to offend no one, but clever developers won't be employees of such institutions for too long -- simply because they won't find what they need on places like this. ... and, considering the exceptional cases, a clever developer who finds a revolutionary and lucrative trading algorithm certainly won't give it away for so little in return.
That said, big banks and big financial institutions do have money, but they don't have talent. So, let me invert the fear all seem to have: HFT isn't a strategy only big banks and big financial institutions are able to use: it is the only strategy they are able to use -- and this is a good thing for everyone else. They are also able to operate Market Making Algorithms, but this was kept on it's own article.
Without talent, they are only able indeed able to spend have amounts on infrastructure and gain every µs o
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