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High-Frequency Trading Brings High-Frequency Challenges

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The New York Times has a long and interesting article on high-frequency trading (HFT), which is the use of sophisticated and numbingly fast computer algorithms in financial trading. Often, the use of HFT involves getting information on share prices a fraction of a second earlier than others and making trades accordingly. Like elements created by crashing particles in an accelerator, these prices only exist for a small fraction of a second. Each trade may only produce small profits, but the process is repeated endlessly.

More on HFT, algorithmic trading and latency arbitrage trading — which seem to be roughly synonymous — can be found in many places, including HFT Review and a PowerPoint by Marco Avellaneda, who is on the math faculty at New York University. The Times story focuses on two brokers who are bucking this reality and prefer to trade the old fashion way.

IT staffs that work on Wall Street or related firms are very familiar with HFC. Others should take note about the specifics of this form of trading and, in the bigger picture, recognize the awesome tools that modern IT is building. HFT is a product of the almost unfathomable research and development of the computer industry and the IT and telecommunications sectors.

To think that the science has evolved to the point at which a differentiation can be made in such small timeframes is striking. It also should be noted, however, that high technology progresses at an uneven pace. It’s true that trades can be made with incredible speed. It also is true, however, that the system is not totally reliable. The Times’ story looks at meltdowns, including one in August.

And last month, Knight Capital, a brokerage firm at the center of the nation’s stock market for almost a decade, nearly collapsed after it ran up more than $400 million of losses in minutes, because of errant technology. It was just the latest high-profile case of Wall Street computers gone wild.

The story is quick to say that HFT isn’t solely responsible for the problems. It is a big part, however. The industry is aware of the problem and initiatives. The European Union is considering regulations, according to Reuters. Likewise, ComputerWeekly reports that the Foresight project in the United Kingdom suggests advanced circuit breaker technology can shut down trading instantaneously when anomalies occur. Symmetricom, meanwhile, today said it is moving into HFT with the TimeProvider 5000. It is, according to the company, a “grandfather clock” that complies with IEEE 1588 and optimized for HFT.

Clearly, there is a lot of action on the HFT front. IT and telecom personnel not directly in the financial sector should understand what is going on. Much of the innovation in the field — and the challenges it brings — will be felt elsewhere as time passes.

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