High-frequency trading
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| High-frequency trading | |
|---|---|
 Elembis · Public domain · source | |
| Name | High-frequency trading |
| Type | Financial market activity |
| Main instruments | Equities; Futures; Options; Foreign exchange |
| Key locations | New York City; London; Chicago; Singapore; Tokyo |
| Notable firms | Citadel LLC; Renaissance Technologies; Two Sigma; Jane Street Capital; Jump Trading |
| Founded | 1990s–2000s |
High-frequency trading High-frequency trading is a form of automated market activity that uses high-speed systems to submit, modify and cancel large numbers of orders in milliseconds. Practitioners operate from trading centres such as New York City, London and Chicago and include proprietary firms like Citadel LLC and Renaissance Technologies as well as broker-dealers connected to venues such as NASDAQ and New York Stock Exchange. The practice interacts with infrastructure providers including Equinix and exchange operators such as Intercontinental Exchange and CME Group.
Overview
High-frequency trading occupies a niche alongside participants like Goldman Sachs and Morgan Stanley in markets governed by laws such as the Securities Exchange Act of 1934 and overseen by agencies including the U.S. Securities and Exchange Commission and the Financial Conduct Authority. The industry relies on services from firms like Bloomberg L.P. and Thomson Reuters for data and connectivity to matching engines at venues such as NASDAQ and London Stock Exchange. Market structure debates reference events such as the Flash Crash of 2010 and involve policymakers in institutions including the Federal Reserve and European Central Bank.
Technology and Infrastructure
Firms deploy hardware from vendors like Intel and NVIDIA and colocate servers in facilities run by Equinix to reduce latency to exchange matching engines at CME Group and Intercontinental Exchange. Network design often uses microwave links between data centres in corridors connecting Chicago and New York City built by companies similar to Straight Path Communications and Exelis. Software stacks incorporate languages and systems influenced by projects at firms like Google and Microsoft; developers may draw on techniques from Apache Kafka and Linux kernel tuning. Security and resilience planning includes practices used by Deutsche Bank, UBS, and Barclays and employs risk tools comparable to those used at BlackRock and State Street.
Trading Strategies and Algorithms
Common approaches include market making used by firms like Jane Street Capital and Optiver; statistical arbitrage practiced by groups such as Two Sigma and Renaissance Technologies; and latency-sensitive tactics executed by outfits like Jump Trading. Strategies interact with order types offered by venues such as NYSE Arca and BATS Global Markets and may reference tick sizes set by regulators like the Commodity Futures Trading Commission. Firms backtest algorithms using historical data from vendors including S&P Global and IHS Markit and deploy execution algorithms resembling those developed at IMC Trading and Flow Traders.
Market Impact and Risks
Critics and supporters cite studies by universities like Massachusetts Institute of Technology and University of Chicago and think tanks such as the Brookings Institution regarding liquidity contributions and adverse selection. Episodes such as the Flash Crash of 2010 and disruptions involving venues like NYSE Arca and NASDAQ OMX highlight operational risk and systemic concerns discussed by committees at the Federal Reserve Bank of New York and the International Organization of Securities Commissions. Counterparties affected include banks such as JPMorgan Chase and Citigroup and asset managers like Vanguard and Fidelity Investments. Market manipulation prosecutions have involved firms subject to enforcement by the U.S. Department of Justice and the U.K. Financial Conduct Authority.
Regulation and Legal Issues
Regulatory frameworks include rules promulgated by the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, and regional regulators such as the European Securities and Markets Authority. Legislative responses reference statutes like the Dodd–Frank Wall Street Reform and Consumer Protection Act and directives from the European Parliament such as Markets in Financial Instruments Directive. Enforcement actions have engaged agencies like the U.S. Department of Justice and the Financial Conduct Authority and involved litigation in courts including the United States District Court for the Southern District of New York. Industry groups such as the Securities Industry and Financial Markets Association and exchanges like NYSE have proposed market structure changes and self-regulatory measures.
Historical Development and Notable Events
Early automated trading traces to systems implemented by firms such as Salomon Brothers and exchanges including NYSE in the late 20th century; later milestones involved the rise of electronic venues like NASDAQ and algorithmic shops such as Renaissance Technologies and Two Sigma. Notable incidents shaping policy and public attention include the Flash Crash of 2010, the 2014 enforcement actions against firms by the U.S. Securities and Exchange Commission, and technical outages at operators like Nasdaq and BATS Global Markets. Academic contributions from scholars at Columbia University, Harvard University, and Princeton University have informed debates, alongside reports by bodies such as the Financial Stability Board and the Bank for International Settlements. Major liquidity events have involved market participants including Goldman Sachs, JPMorgan Chase, and hedge funds like Bridgewater Associates.