High Frequency Trading A couple of my clients asked me once, in the course I of the existence of such a phenomenon in the trade as high trading.
Of course, I am familiar with this phenomenon, but, anticipating the next question, answer - the money of our funds are managed, of course, in manual mode because due to the huge cost of the TSA of any other method at this stage of Commons speech and can not go.
Nevertheless, below is some information about this animal - a high-frequency trading.
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Daniel Tierney And Steve Schuler like all the other mysterious traders inhabiting the world of finance. Office of their firm's Global Electronic Trading Co. on the second floor of the Chicago Chamber of Commerce behind the inconspicuous door, without plates. On their site, until recently, can be was found only a list of recommended books, which featured books such as "Reminiscences of a Stock Broker", and only in late summer there there is some information about the company. None of the public photos of her owner you will not find anywhere else.
But there is one circumstance which Tierney and distinguished from other Rounders: Getco (so-called short of the company) today rabotatet in the regime of high trading "says Tierney. In translation human language this means the following: Getco earns huge amount of money, performing thousands of transactions with securities in the second. This occupation has received called "high-frequency trading" became hit of the season on Wall Street. According to the Tabb Group, even though last year's collapse of the financial transaction rynvershaet 15% of all securities traded in the U.S., and it puts it on par with giants such as Goldman Sachs and Fidelity Investments. It is said that two years ago Getco has already cost $ 1 billion, and last year, rumored to have earned $ 500 million net profit. 39-year old Tierney and 47-year-old Shuler can be safely attributed to a number of America's wealthiest financiers.
«We raise efficiency of financial markets, bringing them technological innovations, markets, the aggregate gross profit "high" the trader $ 21 billion in June 2009, the volume of transactions on the New York Stock Exchange (NYSE) rose over the same period last year by 43%, reaching 6.2 billion shares; believe that while the share of "high" traders have 50%. 70% of transactions. Roughly the same pattern observed in the electronic futures markets and options.
Activities "high" traders led to the most painful and controversial change in U.S. securities markets securities in their entire history. For decades, the leadership in this market belonged to the NYSE, the share of which rarely falls below 80%. Then, NASDAQ and other electronic had begun to afflict the Exchange NYSE, but only recently has the structure of the financial market is really shaken up all the same "high" and traders a handful of assorted stock exchanges, which suddenly found themselves drawn into the orbit of their influence. Over the past two years, thanks to their collective efforts of the share controlled by NYSE volume of securities decreased from 50% to 28% - and this despite the fact, that the NYSE has brought his legendary playground in the sacrifice of the whims of "e" crowd.
"High" traders have reshaped the financial markets just as they did before the lords of Wall Street, the sample 1980 - Financiers of funds junk bonds, corporate raiders and private equity funds. "High" traders, and they generate public marketplaces, which serve them, and so-called "dark pools" (mass unaccounted for liquidity) have become targets of criticism from desperate private investors and public policy makers who are outraged - outraged! - The fact that Wall Street is trying to amass money in such hard times.
Committee Chair Securities Mary Shapiro warns that the opacity of the "dark pools" may "undermine public confidence in securities markets." Chapter NASDAQ Robert Greyfeld generally calls for an immediate ban the activities of "high" traders. "America is destroying the structure of its capital market, - Says, not hiding discontent, Thomas Caldwell, head of Caldwell Asset Management, invests in shares of NYSE.
But there is another point of view: all of this grunt the public simply can not see the whole picture. Because "high-" trade creates additional liquidity, accelerate execution of deals and narrowing spreads. Among those who share this view - George Sauter of the largest family of funds of Vanguard Group, responsible for portfolio investments in the amount of $ 920 billion, "We believe that" vysokochastotniki "increase the attractiveness of trading platforms for all traders," - he says.
Daniel Tierney, a scientist and economist and philosopher, began trading options on the site of the Chicago Options Exchange in 1993. His future partner, Stephen Schuler began in 1981 futures broker on the Chicago Mercantile Exchange, and then formed his own firm. Familiar with each other on Chicago's financial coterie, Tierney and Shuler in 1999, began discussing the possibility of establishing a joint business and in the same year established Getco, finding themselves at the forefront of brokers who began to move from trading halls of stock exchanges in crowded computer server room.
At first Getco huddled in one room of the firm Rounders, which barely managed to squeeze two desks and computers. Traders for the company looking for partners among experienced videogeymerov of the number of students who studied at the nearby Illinois Institute of Technology. As the Getco Tierney and Shuler started buying equipment dying dot-com and reconfigure it in such a way to conduct transactions on the exchange through computers - with even less participation rights.
Getco main strategy from the outset has become a fast, violent electronic securities trading. The first target firms have futures transactions which had been transferred to other electronic exchanges. Tierney and Shuler have programmed their computers to ensure that they appoint quotes and close deals faster than the competition. And once the market will react, repeat it again. By placing both the application for buying and selling the same securities, Getco can "reap" the spreads in the tenth or even one hundredth share cents to several thousand times a day while reducing the amount of risky investment. Lost due to lower risk income Getco gets through trade volumes. 220 employees working in offices in Chicago, New York, London and Singapore, the daily transactions with 1.5 billion shares.
Computerized trade - the phenomenon is not new, as are not new and attempts to demonize the consequences that it might lead. The era of exchanges with traditional trading rooms began to diminish in the early 1980's, when the electronic system gained popularity NASDAQ. A new kind of trading first took up computer geeks. But after they blamed the "Black Monday" in 1987, the influence of traders, programmers limited by conventional circuit breaker. Ten years ago, SOES-bandits - so called people who trade securities through electronic execution of small orders (SOES), - began to nail down a lot of money by arbitrage spreads arising from the difference in the rate at which updates their prices marketmey-kery NASDAQ. But the collapse of the dotcom and buried SOES-bandits.
In 1998, the head of the Securities and Exchange Commission Arthur Levitt (now advisor Getco and Goldman Sachs), dissatisfied with the monopoly of the NYSE and NASDAQ, has made adoption of the Rules, regulator of alternative trading systems (Reg ATS). This has generated a huge number of so-called electronic communication networks (ECN), which has brought directly to buyers and sellers of securities. Two years later, the stock exchanges, first set prices for shares in the form of simple fractions, switched to decimal format. Literally one day minimum spread, market maker who could put it in his pocket, dropped from 6.25 to one cent.
In classical manner characteristic of Wall Street, traders rushed to find new ways of generating income. Some of them are difficult to be called honest. In 2004, seven firms worked on the NYSE, had to pay $ 250 million on claims: brokers accused of illegal transactions at their own expense before the execution of client orders.
Others discern legitimate opportunities provided by electronic markets. The big brokerage firms bought stakes in various ECN, appeared in 1990. In 1999, Goldman Sachs paid $ 550 million for the company Hull Group, which deal in options, using computer algorithms. A year later, in an interview with Forbes Duncan Niederauer described traditional stock trading as "unlife-capable models. Then he worked at Goldman Sachs, responsible for operations with derivatives. Now Niederauer leads NYSE.
final structural change, paving the way for the current "electronic" revolution-tion in the securities markets, began Regulation System national market (RegNMS), introduced in the U.S. in 2005. Prior to that brokerage firms (at least in theory) have been obliged to offer the client the best possible embodiments of his order. But at the same brokers, in its sole discretion to determine what constitutes "best" option - the fastest deal or a deal on the very attractive price. This left the brokers set of loopholes in order to compare the application for the sale and purchase and either make internal trade among themselves, putting themselves in the pockets of the spread, or send an application to the stock exchanges, which they were paid kickbacks for the increase in liquidity.
introducing the same new regulations, the SEC has clearly defined that market orders to be transmitted electronically and immediately executed at the best price on a national scale. For Getco and all of its "high" fellow regulation national market system has a real gift. Many of them have started to place double-sided quotation requests for hundreds of shares. Others engaged in arbitrage play on tiny spreads, which occur between orders to buy and to sell at any given time. Still others have earned through kickbacks, which they were offered stock exchanges for the increase in liquidity - this activity is called "relapsing Trading» (rebate trading). Finally, there were arbitrageurs, who Like its predecessors among SOES-gangsters made money on price differences arising due to the microsecond time lags between the stock exchanges.
Today for pieces of "high" pie fight hundreds of companies: giants of the caliber of Goldman Sachs and Barclays Capital, the hedge funds like Citadel and lesser-known players such as Getco and Wolverine Trading. Lime Brokerage Company of its luxurious manhettens-one office with a rooftop garden provides transaction support for the 200 "high" Traders FIR firms and individuals. "High" Trading is going through a similar boom as hedge funds in mid-1990. Virtually every-dy day there are new "high" companies, attracting the leading specialists of the financial market. Former head of the New York Mercantile Exchange Vincent Viola has recently created a firm Virtu Financial and lured to himself, Christopher Konkennona responsible for service transactions on the NASDAQ. Rushed into this area, and private equity funds. It is said that General Atlantic sched-tila from $ 200 million up to $ 300 million for a 20% stake Getco (Tierney, Shuler and staff Getco owns 80% shares). Last year TA Associates has acquired a stake in the RGM Advisors, and Summit Partners bought a stake in Amsterdam Flow Traders; conditions of these transactions were not disclosed.
emergence of so many players in the "high" trading sparked a race of "technological" weapons. In July 2009, was widely publicized case of former employee of Goldman Sachs Sergei Aleinikov, who was arrested by FBI agents on suspicion of theft of trade algorithms. Citadel filed a separate lawsuit against the current employer Aleinikova - Company Teza Technologies - she, according to plaintiff, could gain unauthorized access to its software provision for trading, on the development of which Citadel has spent hundreds of millions of dollars. However, the Government has not put forward any charges against Teza in illegal acts.
today to engage in "high frequency" trading, you need the latest technological equipment. And in large quantities. Company Infinium Capital - the biggest market in the futures market for natural gas - has its operations from the office area of 9000 square meters. m in a data center on the Chicago River. The heart of this office - dozens of monitors.
Infmium Computers connected to the utility power grid, but for safety net The company has two autonomous redundant substation and rechargeable ba-tarei total weight of 90 m. However, for complete safety and it is not enough. Just in case Infinium has purchased and sets diesel generator power of 2000 kW. With the servers of the Chicago Mercantile Exchange, located on the same floor data center computers Infinium joined by a special fiber-optic lines, allowing transfer of up to 5000 requests per second with a time lag of less than 10 milliseconds. Have Infinium and other servers located near the strategically important servers, stock exchanges, "in New Jersey, London and Singapore.
«High" boom is changing the face of the securities markets generally. Four years ago, 13 former employees of the firm trader TradeBot of Kansas City created a new ECN called Bats Trading. Now, among its investors - Getco, Wedbush Morgan, Lime, and seven major banks. Last year, the Bats to a full exchange, increase their legitimacy and eliminating time lag in reporting on transactions conducted on other exchanges. Now the share of Bats arrive at the reduces about 12% of all daily transactions with U.S. securities. Another 14% of total the volume of daily transactions it carries out rival Direct Edge, which stand for Goldman, Citadel and Knight Trading.
need for high speed data transmission, in turn, has created high demand for real estate, located as close to stock exchanges. Rent for the 0.5 square meters. m of space in Chicago data center, where we find-server converge major stock exchanges, is $ 2000 per month. "It happens that the trading companies pay to 100 times larger to accommodate their servers. The usual thing, "- said Scott Caudell of the company 7ticks, in charge of the servers are dozens of companies in the same Chicago data center. Now Even traditionalist NYSE plans to open a New Jersey technical center area of 36,000 square meters. m and is already taking orders for colocation.
What's so subversive? The fact that the minimum possible to measure the term robot traders seem to have an unfair physical advantage over other investors. You'll be surprised, but the reality is: a hefty portion of their income, "high" traders get due to the fact that they are coming to market sooner than it can in principle do small investors. In "high frequency" the world the 20 milli-seconds, for which the application of Chicago arrive at the NASDAQ trading floor in New Jersey (as is known to the public a sparkling display at the NASDAQ in New York's Times Square, no more than a TV prop.) - An unacceptable lag time. And so unacceptable that as a result, a whole a trading strategy, dubbed "a hidden arbitration."
Does this mean the institutionalization of unequal conditions for investors? Yes and no. Small investors actually lose the opportunity to do money on the margins of 0.1 cents. But the person who buys 1000 shares of ExxonMobil, it is unlikely to be disturbed. For him, the risk of another: overpaying for 5 cents per share, it is through few seconds may find that quote down to the same 5 cents - maybe because of the fact that brokers, intermediaries saw that he was going to do and he was deprived of such opportunities.
For years, regulators have tried to make the process of trading in securities honest to bidding and request prices given in the open. 31 years ago, when Arthur Levitt headed the American Stock Exchange, proposed to introduce a "summary Order Book »(composite limit order book), which made it difficult to middlemen pocket undeserved spreads. The idea received no support, but its variation in the form of various standards designed to make the market transparent, there were constant. The problem with these regulations in that they will not force anyone to actually "Bluff." The regulator may, for example, regulate what order the package of 10,000 shares should be set up for auction for a certain number of seconds. But it does not oblige the trader hedge fund, putting those 10,000 shares, to disclose its intentions regarding the remaining 90,000 shares.
It is not surprising that today the "book-" full of false attacks and counterattacks, committed in the blink of an electronic eye - the application for purchase and selling packages of 1000 shares have become a cover for transactions with millions of shares. Unfair to the smaller players? Not necessarily. Their salvation - The volume of transactions. If deals are made every second with a sufficiently large number of shares, it is unlikely the small investor otsekut of nickels spread.
Another controversial offshoot of "high" trading - the so-called sponsored access, without which no costs have 15% of transactions conducted on the NASDAQ. In the past, traders were required to send each application registered broker-dealers that are either transported its stock exchange, or performed yourself. Sponsored access allows traders to send orders directly to the Exchange. This is of concern to those who believes that the lack of control over the traders could lead to a catastrophe, what has already happened in the derivatives market during the current financial crisis.
Some "high" traders sent 1000 requests per second. If suddenly in the trading system fails, then for those two minutes, which usually go to remedy the situation, inattentive trader can send 120,000 of erroneous bids. If these shares are worth $ 20 apiece, then the cost of failure will be disastrous $ 2.4 million
«If you do not strengthen the control, then followed the collapse in the spirit of a collapse of Long Term Capital Management [in 1998] will just 5 minutes "- Lime Brokerage warned in a letter sent to the Securities and Exchange Commission in June this year.
If many of the centers stock trading adapted to the maintenance of "high" traders, the "dark pools" are doing everything to escape their attention. Seth Merrin made at Liquidnet 1999 as a platform on which professional money managers can anonymously share large packages of securities. "Dark pools" - Direct descendants of the broker's practice, which decades ago were engaged traders Weeden & Co., Goldman Sachs and First Boston: Wall Street then ruled NYSE, but a fair amount of deals with large blocks of shares made not on the open area of the New York Stock Exchange, and in closed rooms "on the upper floors." The task of Liquidnet - Hide from the market, including those from "high" arbitrageurs that the market displayed a large stake, and prevent a sharp price movement.
Merrin beats on "bad market" for new proposals and conducts legal dispute patent infringement, however, he's going to make a public Liquidnet company. His company already serves the deal with 61 million shares a day, and Merrin finds himself a crusader, which allows mutual funds, pension funds and other investors to transact in securities at the best prices. In any case, systems like Liquidnet or Advanced Execution System, created by the bank Credit Suisse (300 million shares a day), approximately 8% of all securities transactions by the end of the year is projected to rise to 10%.
Problem such sources of liquidity that they really "dark" because the secret of their applications from the public markets. In addition, the address of the dark pools "are heard accusations that they are cut off from the investors the best prices as a" dark "and in the conventional markets. And as a consequence - appeals to hard Regulation of "dark pools" or for their immediate ban.
advocates methods of "Big Brother" should calm down. System programmers "high" companies have already got down to business and started to get out, in what period of time between public offers and requests stock prices carry out their transactions "dark pools" to declare their own prices near these time periods (thus forcing the "dark pools" search Countermeasures Countermeasures "high" traders).
This game of "cat and mouse" further increases the speed transactions and even more narrowing spreads. Perhaps it is not quite the securities market, which is envisioned his "supervisors", but it works excellent.
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