How much do high frequency trading firms make
High Frequency Trading is quite a hot topic nowadays. It is a form of algorithmic trading where you gain an advantage by being faster than the other market participants. But how do high frequency traders make their money? The important thing is that the HFT firms do not invest, they do a short term millisecond speculations.
They risk only small amount of money relatively to the money they can win and they never take positions over-night. According to the book there how much do high frequency trading firms make three major ways in which HFT works. For example, the investor wants to buy Because of the size of the order, it is usually impossible to do it in one transaction on one exchange. The firm notices the first small transaction and expects more, larger ones to follow.
Therefore, the firm quickly quicker than the investor and other firms buys the AAPL shares to sell them to the investor at higher price a few microseconds later. There are many ways - the simplest and most reliable is to buy access to how much do high frequency trading firms make order stream directly from a stock exchange. Firms pay a lot of money to see the stream of orders just before the other investors. The other option may be to flood the exchanges with tons of orders to buy and sell small quantities and through observing their execution predict the following parts of the transactions.
Why does it work? For example, you want to sell There is a buyer for the full amount In the old days there were one or two stock exchanges per country with a flat commission rate paid to them for executing orders. Nowadays, there are many of them over fifteen public exchanges in the US plus even more private exchanges, aka dark pools.
Instead of a flat rate they offer sophisticated schemes of commissions and premiums paid by and given to the trading parties. The HFT firms buy and sell in a way which provides no additional liquidity, but scalps the premiums from the exchanges. For example, an exchange A pays a small premium for buying and an exchange B for selling. The HFT can race both sides of the deal to the exchanges and take the premiums. According to the book, this is where the most of the money is made.
High frequency trading firms are new kind of beasts in the financial markets. They are not on the sell sidelike investment banks creating new vehicles to invest in; they are not on the buy side either, like mutual funds picking the best assets. They are more like a tax the investors have to pay.
Due to various features of the markets they are almost guaranteed to outrun all the regular investors including even the biggest funds. They boast many years without losing money how much do high frequency trading firms make a single day. They take small risks and earn huge profits at the expense of the other investors. In the book the tax is estimated at 0. As an HFT you need to be first. The trading algorithms themselves are not exceptionally sophisticated in this business.
What does matter is the raw speed. It takes microseconds to blink an eye srcwhile high how much do high frequency trading firms make traders are interested in gaining an advantage hundred times smaller. To achieve such a speed you need to be crazy about your hardware, connection lags to the stock exchange point of entry, routers, cables, everything.
Of course your software also needs to be tuned for speed. Even though, the book portraits HFT as a modern equivalent of a highwayman and their trade as a morally doubtful one, from the technological point of view it is a very interesting problem and a huge challenge. I envy a bit the engineers working there. This book is heavily criticized by some people in mass how much do high frequency trading firms make social media. Of course not everybody will like it.
Nevertheless, a lot of the criticism comes from the people having a stake in HFT market, who therefore have good incentive to keep it obscure src. In my opinion, the book is great. It offers an interesting story with both positive characters and villains.
It also shows a new kind of industry making great money and the attempts to tame them. I can highly recommend it. Rebate arbitrage In the old days there were one or two stock exchanges per country with a flat commission rate paid to them for executing orders. Slow market arbitrage According to the book, this is where the most of the money is made. Money at stake High frequency trading firms are new kind of beasts in the financial markets. The challenge As an HFT you need to be first. Book This book is heavily criticized by some people in mass and social media.