These days, high-frequency trading (HFT) is a controversial topic in economic discussions. Critics bemoan the proliferation of high-speed trading. They claim it destabilizes global financial systems, while proponents say that HFT is a natural progression in the development of new financial-trading tools.
As algorithmic trading continues to advance, the line between human trading and machine trading is becoming blurred. It’s difficult to guess the upper limits for speed in trading. Yet, the next wave of evolution in technology for trading is likely to be the expanded use of artificial intelligence (AI) to build trading systems which trade smarter instead of merely faster. Continue reading
Democratizing traders’ access to algorithmic trading systems serves everyone’s interests. For the sake of robust, sustainable global economic growth, it’s critically important that quantitative traders have access to affordable high-performance algorithmic trading systems, regardless of their geographic location or their amount of assets under management.
Democracy is often defined as a form of government in which supreme power is vested entirely in the people, and directly exercised by them in a free, open system. By extension, a democratic trading platform is one in which the aggregate decisions of all traders directly influence the marketplace, without being constrained by proprietary software owned by special interests or market gatekeepers.
Algorithmic trading systems have the power to truly democratize the world’s marketplaces. Empowered by high-performance algorithmic trading tools, individual traders can help keep marketplaces, institutions and governments “honest” by providing them with economic feedback in the form of lightning-fast trades executed in response to real-time events. Before considering how algorithmic trading software can help save the world, let’s first consider the evolution of software in general, and its implications for the global economy.
One Ring to rule them all,
One Ring to find them,
One Ring to bring them all
and in the darkness bind them.
J.R.R. Tolkien, The Fellowship of the Ring, 1954, Chapter 2
In the fantasy world crafted by the late author J.R.R. Tolkien, the key to winning the game (and surviving those ever-present forces of doom) was to be found in a set of magical powers flowing from a single source which seemed to be always hidden just beyond reach. The only successful solution would result from uniting the far-flung pieces of the puzzle into a single all-powerful tool.
In the trading world, we used to think that this “One Ring” was the technology itself, although the reality is that the trader himself is always the key to success. We mistakenly chased technology for its own sake, and in doing so we lost sight of the trader. The role of technology is not to create success, but rather to empower the trader to find his own success, by providing the control needed to unite disparate tools into a complete synergistic system which executes his will.
Today’s quant traders face a dilemma: In spite of having access to millisecond trading platforms and a wide range of technological wizardry which would have seemed unbelievable as recently as a few years ago, technology-based solutions for trading involve multiple, dissimilar elements…. Traders are still faced with the need to patch together a mishmash of tools in order to build and profitably use their own personalized trading systems.
One of the questions I am asked most often is who makes up our open source community?
Usually the person asking the question is a new member of the community that has set out to build a new trading platform for their firm. They have selected Marketcetera as the core of this new platform in an effort to accelerate their time to market and are often looking to collaborate with other community members and take advantage of existing best practices.
As part of this effort to better connect community members, we have surveyed new registrants to understand their composition and priorities. If you contact me directly I’d be pleased to share the complete results, but there are a few points that I would like to highlight.
The HFT pursuit has triggered a technology arms race across our industry with tremendous capital (human and financial) expended chasing elusive microseconds.
In the midst of this full-throttle pursuit, it is worth considering some of the fundamental assumptions of great software design. One of the most basic (and often over-looked) questions is whether to pursue a proprietary system or opt for an open source approach.
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:
- 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.
- 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 High Frequency Trading?
Ask a dozen traders and you’ll get a dozen different answers. Some say it involves program trading, stat arb and quantitative modeling coupled with extremely low latency and high frequency trade execution. Others say it is where alpha generation is purely based on speed.
Quants define it as “exceptional speed + algorithms or automatic strategies.” But, who gets to determine whether your speed is “exceptional” or if you are using enough algorithms to make the cut?
Two data points surfaced in recent days that underline why we’re so passionate about democratizing trading with open source software.
First, hedge fund returns are up. And not just up from the carnage of last year, but with 2.5% returns in September, it’s looking like hedge funds could have their best year since 2003. According to the Eurekahedge Fund Index — and bolstered by a number of other hedge fund research firms — the industry grew by $26.3 billion last month, bringing total assets managed to $1.42 trillion.
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..
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.