Parsing High-Frequency Trading
High-frequency trading continues to thrive despite being largely mischaracterized in press reports, an HFT practitioner said.
Essentially all large traders and investors deploy high-frequency trading or at least use elements of the methodology, said Peter Nabicht, executive vice-president at Allston Trading, a Chicago-based market maker that has recently set up operations in Europe.
Nabicht noted that HFT is also described as computerized trading, low-latency trading, electronic market making, algorithmic trading, quantitative trading and automated trading. Whatever the moniker, HFT can be boiled down to “using technology to efficiently trade a lot”, Nabicht said at WBR’s TradeTech Europe 2012 in London.
HFT is often, and inaccurately, cast in terms of computers making trading decisions. Nabicht emphasized that humans make the decisions behind HFT; the role of computers is to process data and implement the decisions.
Financial firms’ proprietary-trading desks are actively using HFT, as the firms are actively attempting to poach developers from Allston, Nabicht said.
Another HFT trend is that more firms are selling the algorithms that direct the trading methodology. Nabicht said this shows that the edge lies in trading strategies themselves rather than the algorithms. “If that was where the edge was, they wouldn’t be selling them,” he said.
Lastly, Nabicht said that being the fastest trader isn’t a sustainable edge. “Speed should aid alpha, not be alpha,” he said. Rather than consisting of the profit, being faster than rivals can add pennies to a strategy that is already making dollars, he added.
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