Over the last couple of weeks i have come across lots of articles about high frequency trading. They all talk about how important computers and software is to this but since they are all written from a financial point of view there is no detail about what does software do?
Can anyone explain from a programmers point of view what is high frequency trading? and why is computer/software so important in this field?
There are two parts to any HFT system:
Real time super low latency trading - subscribe to real time order book and price information from lots of different sources, execute calibrated algorithms designed to either carry out a large order with minimal slippage (i.e. you want to buy 1 million shares of IBM by the end of the day without moving the market too much), or just to try to statistically make money based on short term arbitrage. This system also has to provide good risk and position management tools to allow one or more human operators to effectively monitor and control what the system is doing.
Overnight/Weekly etc. analysis of large quantities of "tick data" (price, time and order book information, and historical data on the systems previous trading activity), looking to optimize and "search for" the best algorithms to be executed in real time by part #1. i.e. "calibrate" and test the algorithms that will execute in #1.
The first one requires low latency and extremely good access to markets (i.e. a direct network connection to the exchange with minimal hops). This part usually has to be written in a non-GC language like C or C++ (a half second delay while the garbage collector stops the world could be very costly). The second usually requires a grid and lots of good simulation and statistical analysis software, AI algorithms etc.
At certain times (for example on a futures expiry) it is necessary to do thousands of trades a minute - obviously humans can't do this unaided. This BTW is a very stressful time for the programmer, as if anything goes wrong, there is almost no chance of recovery - programmers tend to watch their log files go streaming by with their hearts somewhat in their mouths.
You need to track prices, quickly decide what is going up and down and buy and sell accordingly. Since there're lots of different positions traded the better software you use for that analysis and performing deals the more money you can potentially make.
Better would mean frequently updating data, pinpointing interesting tendencies in such a way that you can react to them quickly, being easy to use when performing frequently required operations.
why is computer/software so important in this field?
The highest performance and lowest latency is desirable, since the faster that you can react to things, the more money you can potentially make.
