The High Frequency Game Changer

The financial industry's leading independent research firm's forward-looking assessment into high frequency trading Once regarded as a United States-focused trend, today, high frequency trading is gaining momentum around the world. Yet, while high frequency trading continues to be one of the hottest trends in the markets, due to the highly proprietary nature of the computer transactions, financial firms and institutions have made very little available in terms of information or "how-to" techniques. That's all changed with The High Frequency Game Changer: How Automated Trading Strategies Have Revolutionized the Markets. In the book, Zubulake and Lee present an overview of how high frequency trading is changing the face of the market. The book Explains how we got here and what it means to traders and investors Details how to build a high frequency trading firm, including the relevant tools, strategies, and trading talent Defines key components common to HFT such as algorithms, low latency trading infrastructure, collocation etc. The High Frequency Game Changer takes a highly controversial and extremely complicated subject and makes it accessible to anyone with an interest or stake in financial markets.

Introduction xi Acknowledgments xiii Chapter 1 Birth of High Frequency Trading: Equity Markets Go Electronic 1 Defining High Frequency Trading 2 Who are the High Frequency Traders? 6 Impact of High Frequency Trading 9 Building a High Frequency Trading Team 13 Chapter 2 Market Structure 15 Order Handling Rules of 1997 16 Growth of Electronic Communication Networks 17 Regulation National Market System 22 Market Fragmentation versus Competition 28 Dark Pools 32 Chapter 3 Trading Infrastructure 47 Rise of High Performance Technology Vendors 49 Key Components of High Performance Infrastructure 52 Feed Handlers 52 Ticker Plant 54 Messaging Middleware 55 Storage 58 Networking 59 Colocation 60 Sponsored Access 61 Chapter 4 Liquidity 71 HFT as Liquidity Providers 71 Flash Crash 72 Chapter 5 Trading Strategies 75 Examples of Algorithms 77 Order Types 78 Flash Orders 79 High Frequency Trading and Predatory Strategies 79 Chapter 6 Expansion in High Frequency Trading 81 Futures 81 Fixed Income 84 Foreign Exchange Market 85 Equity Options 92 Over the Counter Derivatives 94 Expansion into Global Markets 94 Chapter 7 Positives and Possibilities 105 Commoditizing High Frequency Trading 106 Trading Technology Demands and Preferences 108 Internal Focus 109 Choosing Vendors 110 Finding the Next Opportunity 111 Issues and Risks 114 Order Routing Gets Smart 115 Smart Order Routing’s Future 118 Is Artificial Intelligence Next? 121 Economic Indicators 121 News 122 Securities and Exchange Commission Filings 123 The Pseudo-Semantic Web 125 Going Global 128 The Next Wave 129 Chapter 8 Credit Crisis of 2008: The Blame Game 131 U.S. Federal Reserve 131 Regulatory Agencies 132 Credit Agencies 132 Politicians 132 End-Users of Derivative Products 133 Recent Regulatory History 134 Financial Modernization Act of 1999 134 Commodity Futures Modernization Act of 2000 134 Dodd Frank Wall Street Reform Act of 2010 135 Ending Too Big to Fail Bailouts 136 Creating Transparency and Accountability for Derivatives 137 Hedge Funds 137 Credit Rating Agencies 138 Executive Compensation and Corporate Governance 138 Impact of Potential Regulations and Rule Changes—Securities and Exchange Commission Concept Release 139 Chapter 9 Conclusion 141 Glossary 143 About the Authors 149 Index 151