Marketcetera Platform Blog

Why all the Fuss?

High frequency trading has gotten a lot of media attention over the past few days, much of which most of which has been negative.  This is due to a couple of factors:

1. The down market has created disgruntled (and vocal) concerned citizens wary of the finance industry.  That resentment and distrust has surfaced in the mainstream media in which bailout money, AIG, Lehman Brothers and the finance industry are lumped together and demonized as an amorphous, sinister entity out to trample the rights of the common person.  High frequency, in the eyes of the layman, is representative of this.
2. People don’t really understand high frequency trading.  In many instances, it’s wrongfully lumped together with practices like flash orders or short selling.  The real danger with this lack of understanding is that it leads to uninformed regulation. This perpetuates the lopsidedness of the market and results in regulations created to control a few being extended to many. One size cannot fit all in a regulatory landscape.

What is the Next Hurdle?

The market crash has created a political environment where heavily lobbied decisions that may not in the best interest of market participants are being forced on the industry.  Under political pressure and widespread scrutiny from the media, the SEC doesn’t have the luxury of time to do extensive due diligence before legislating.

During the the crash the SEC tried to prevent stocks from falling with regulations like banning short selling, but the spreads only got larger and because of the hysteria, there is now political pressure to bring back some version of the rule which was studied for years before finally being repealed.  The data and statistics show that it will probably have a negative effect but there is a hue and cry to do something, so something must be done. For those who argue that current market structure does not work need a lesson in history, to start of with even with all the turmoil that was happening in 08 stocks still have tight spreads and liquidity was available across the broad spectrum from small cap to large cap. What more of a test can you ask for than what happened in 08 ?  Whereas back on Black Monday in 87 and in the early 90s, for Nasdaq listed stocks the market would completely dry up the bid/ask spreads become too wide to be usable in really bad market conditions.

The current climate, lack of knowledge about what caused the market crash and the need to do something combined with a lack of understanding of HFT has caused it to become a the target of blame for anything wrong.

What Does the Future Hold?

Matching engines, a major part of the trade execution process, are currently limited by the communications between servers they run on. Technology-forward liquidity venues like NYSE are working on things like broad in-memory trading.  In as little as 3-4 years, everything will sit in one big memory box, removing the physical drag of communication between computers.  Latency’s only limitation will become that pesky speed of light and it will make today’s trading pace look like a horse and cart race.

The cost of entry and ability for smaller players to be able to participate will continue to increase as more competing vendors force prices down, for example the executing broker Lime Brokerage is known for providing very low latency execution.

Technologies like open source are also enjoying extensive adoption at investment firms of all sizes. Access to source code means infinite flexibility without being beholden to proprietary vendor release schedules and cost. Financial firms that have no internal software development can take advantage of the existing functionality in an open source platform, and innovate where they need to. Some of the world’s largest banks are using open source at every point in the investment cycle including Linux platforms, CEP engines like Esper, front-end trading platforms like Marketcetera and feed handlers like the Collaborative Software Initiative.

What Does it all Mean?

Several years ago, the barrier to entry into the world of high frequency trading was patently higher than it is today.  There were numerous startup costs, including expensive hardware, implementation, service and maintenance.  Only the bulge bracket sell side and buy side firms could play in this game. Today, if you are a small buy-side shop with two traders and a developer you could be up and trading automated strategies productively in three to four months.

There is a also a cultural change starting whereby technical people are collaborating virtually and sharing information about the standardized infrastructure… a great example is QuickFIX.  Trading firms are able to spend more on intellectual capital – the strategies and the algorithms that will gain them competitive advantage – instead of saddling themselves with large capital investments in expensive and restrictive infrastructure. The level playing field created by this perfect storm of technology and market pressure will bring with it thousands of new entrants into the high frequency trading game.

High-frequency trading (HFT) could use a good image consultant.  Everyone from Floyd Norris to Chuck Shumer have questioned the validity and even legality of high-frequency strategies, as they have taken over from exchange floor specialists as the mainstream media’s favorite whipping boy.

Unfortunately HFT is a term like “salad” where there are many definitions, and no one covers the entire set.  We define HFT as high-speed, high-volume, low-latency trading enabled by technology. It’s what the Marketcetera platform enables and it’s all about responding quickly to inefficiencies in the market..

It’s also unfortunate that the media have helped conflate HFT with a couple of other trends that have given it a bad name. The practice of flash orders — for example, giving order floor access to a limited number of market participants, which I would argue isn’t good for the market structure — for example, is being twisted up with HFT in some news stories, coloring it an unfair advantage.  It’s true the same technology can enable HFT and trading flash orders, but the two are not equivalent.  There are many high-frequency strategies that operate outside the limited number of venues providing flash orders.

A second issue conflated with HFT in recent discussions is the apparently large profits generated by banks that a) have taken TARP funds, and b) have produced significant returns based on HFT.  HFT has been identified as a government-funded unfair advantage that the big banks have over the individual investor.

I don’t buy it.

Whenever inefficiencies can be removed, it’s constructive to the market. That to me is a fundamental principle of capital markets. And while it’s true that the larger banks are more likely to have the technology budgets to develop the infrastructure to support HFT, the playing field is leveling quickly.

Bear with me for a marketing message: because Marketcetera’s trading platform is open source, it is cheap, fast and flexible. Our new offering in partnership with NYSE will provide a managed service version of the Marketcetera platform right there in the exchange’s data center, allowing for the same kind of low-latency trading that the big banks, who have paid to park their servers their too, are building strategies.

The point is, technology is evolving and Wall Street is changing. HFT is no longer going to be a tool for the elite few. The analogy we like to use is the racetrack where all drivers have the same car. Once the advantage of the machine is removed, the best driver wins.

As we continue to come out with new screencasts available on our YouTube channel, you may be wondering what inspired me to start this project and what you can expect in the future. In the past few years, I’ve found various videos and demos on Ruby on Rails quite useful and informative. Ruby is the main strategy scripting language supported by the Marketcetera platform. Being able to watch coding and development in action allows you to understand concepts and applications of the language more easily and I knew we had to do the same for our community at Marketcetera.

In the past few weeks, we’ve started with three basic videos: the first screencast describes developing simple strategies in Ruby on Photon, the integrated Strategy Studio. The second screencast shows how to deploy a number of real sample strategies. The third screencast is a demonstration of the Strategy Agent, which allows users to scale strategies to work on multiple machines and handle complex data flows between strategy modules. Future screencasts will include more complex topics and trading strategies. For example, you may see a video on pairs trading and a demo on backtesting.

The goal for the video series as a whole is to provide Marketcetera users with audio-visual explanations for all the features and functions of the Marketcetera platform. We’ve been listening to your feedback so far. Keep it coming! You’ll help us determine the future direction of the videos.

Aite Group, a Boston research firm, reports that the high frequency trading community is now responsible for more than 60% of average daily volume in U.S. equities. High frequency trades are often executed with automated systems. Data volumes are exploding on Wall Street and the number of trades executed each year is increasing significantly. Traders and buy-side firms need technology to handle this fast-paced market. But what is automated trading and how does the human trader fit into the picture? At first glance, the word “automated” seems to eliminate the need for smart human traders and compel conformity in trading strategies. After all, if high-powered computers are doing everything and finding the perfect formulas, then what’s the use of even the best quant?

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Dow Jones Index Drop

The September 2008 market crash has certainly shaken up the trading industry.

For buy-side firms and hedge funds in particular, the volatile period over the last seven months has required difficult adjustments. The realities of a new market have challenged the assumptions inherent in hedging practices and federal regulations (such as the short selling ban) have forced firms to radically change how they do business – from trading strategy to cost structures to IT systems. What have we learned?

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