The High Frequency Trading Arms Race

The High Frequency Trading (HFT) Arms Race is a term that has been bandied about lately. This refers to the insatiable consumption of the latest technology in trading infrastructure for HFT firms in order to stay ahead of the competition. One of the main advantages of an HFT firm is the speed at which they can access the market, and milliseconds can be worth hundreds of millions of dollars. The infrastructure refers to the speeds of the computers, the speed of the data connection, and the speeds of the disk drives and so on.

A friend of mine on Bay street was telling me about an HFT outfit who was in town recently looking at renting/buying property as close to the exchange as possible in order to move their equipment. Once all the firms have the same technology, then they really only compete on two other major factors: their specific trading algorithms and the distance from the exchange. Being 100 metres closer to the exchange means data has less distance to travel and trades can be executed even faster.

There have been calls for imposing some kind of restriction on HFT infrastructure, either in the form of allowed equipment of instituting some kind of built in latency which will effectively render faster access useless. Others have also called for a ban on flash orders (the ability to pay to see orders in the market before everyone else). It remains to be seen what will come of all this, but industry expert Rick Bookstaber pointed out a while ago that this arms race, like all arms races, leaves everyone at the same relative position… only poorer on an absolute basis.

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 3 comments
  • Big Cajun Man

    Proximity to the exchange won’t matter if the data path to the exchange is not direct. They must be hiring Networking Gurus (who come REALLY cheap since the latest high tech bubble implosion), who figure out whether their network connection is close enough to the TSX’s routers and such.

    Hadn’t thought of that one, but I guess when you are working in milliseconds, one less router or bridge could be the difference.

  • Jordan

    I believe I heard the stock exchanges commonly sell colocation hosting to high speed traders so their systems are actually on premise with systems that run the exchange. They might be just a single hop away.

  • Jason

    Jordan, I believe you are correct. I also believe that there are data centres that cater to automated traders that have leased lines into the exchange which is the next best thing to being there.