Essay High Frequency Trading

1493 Words 6 Pages
1.0 High Frequency Trading

1.1 What is High Frequency Trading

High frequency trading is a form of automated trading that uses super computers to transact or process mega transaction orders at super fast speed, which are mostly measured in microsecond or milliseconds. ( Investopedia, n.d) with the aim to identify and arbitrage temporary market inefficiencies that are created by the competing interests of market participants (Aldridge,2013)

Algorithms, low latency technology, high message rates and high speed connections are the 4 main characteristics in the performance of a High Frequency Trading. Algorithms is a set of instructions for accomplishing a given task. So a trading algorithm is just a computerized model with steps to
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1.0 High Frequency Trading

1.1 What is High Frequency Trading

High frequency trading is a form of automated trading that uses super computers to transact or process mega transaction orders at super fast speed, which are mostly measured in microsecond or milliseconds. ( Investopedia, n.d) with the aim to identify and arbitrage temporary market inefficiencies that are created by the competing interests of market participants (Aldridge,2013)

Algorithms, low latency technology, high message rates and high speed connections are the 4 main characteristics in the performance of a High Frequency Trading. Algorithms is a set of instructions for accomplishing a given task. So a trading algorithm is just a computerized model with steps to trade an order in a specific way (Johnson, 2010) The algorithms in HFT are for the purpose of decision making, order initiation, generation, routing or execution for each individual transaction without a human execution. (Aldridge, 2013)

The low latency technology infrastructure on the other hand is a must for high frequency trading. This infrastructure is designed to minimize response times, including its proximity and co-location services which thus improves the execution speed (Cisco, 2014) Therefore, computers play an very important role in replacing slow humans in the trading decisions.

Next on is the high message rates and speed connections in HFT which relates to the response speed for market order entry , orders quotation and

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