ALGORITHMIC TRADING FX
argue that high frequency trading
narrows spreads
between bid and asked (offered) prices, thus reducing trading costs for all market participants. Tey also argue that high frequency trading increases liquidity in the market. Investors with money in mutual funds and pension funds, according to advocates, are particular beneficiaries of high frequency trading that makes it easier for these funds to transact large volumes quickly and anonymously.
volume of each trade, so we cannot say this is an increase in Volume (although it may be). It is an increase in the amount of times prices are updated in a certain period of time. We could call it ‘tick volume’ or ‘price change volume’ because it is an increase in the number of times the price changes, not necessarily the increase or decrease (it could change 1,000 times but only increase or decrease by 2 pips).
(Tick Volume / Volatility) Close [Today] > (Tick Volume / Volatility) Close [10 days ago]
Tis could have been caused by a large amount of orders coming out of European institutions, or due to fund trading, and a number of other crisis related factors. But the unique observation is that this surge in Volume caused many FX trading platforms to become overwhelmed with data. Most platforms update in real time, they couldn’t afford to filter price
data and NOT update in real time. Tus, the platforms began to eat up system memory at an exponential rate, until many servers crashed. Tis was experienced by brokers as well as client terminals.
High Frequency Trading as an Asset Class
As markets become more volatile and uncertain, traditional investments may produce unstable results. High frequency automated systems have the advantage of being able to profit in nearly any type of market. Tese systems should not be discarded as investments for only Elite hedge funds and I-Banks. In fact, it is better for the market if these systems are widely proliferated instead of being controlled by a few powerful funds. Te future of trading may be a battle of computers.
Elite E Services FX TRADER MAGAZINE July - September 2010 33
Tese funds are highly dependent on ultra-low latency networks. Tey profit by providing information, such as competing bids and offers, to their algorithms microseconds faster than their competitors. Te revolutionary advance in speed has led to the need for firms to have a real-time, colocated trading platform in order to benefit from implementing high frequency strategies. Strategies are constantly altered to reflect the subtle changes in the market as well as to combat the threat of the strategy being reverse engineered by competitors. Tere is also a very strong pressure to continuously add features or improvements to a particular algorithm, such as client specific modifications and various performance enhancing changes (regarding benchmark trading performance, cost reduction for the trading firm or a range of other implementations). Tis is due to the evolutionary nature of algorithmic trading strategies - they must be able to adapt and trade intelligently, regardless of market conditions, which involves being flexible enough to withstand a vast array of market scenarios. As a result, a significant proportion of net revenue from firms is spent on the R&D of these autonomous trading systems.
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