Thursday, November 5, 2009

high frequency trading, background article

Among the most common strategies are: being automated market-makers; deploying a predictive approach, whereby certain changes in stocks trigger an order; and pursuing arbitrage, seeking to buy and sell shares at a profit across different platforms.

The speed factor in trading is known as latency and requires constant upgrading of computer systems to stay ahead of the pack. Exchanges also provide space at their data centres for computer servers owned by high frequency traders. This “co-location” means a high frequency trading system can access prices a fraction faster than if it were located down the street, let alone in another city.

It is estimated that high frequency trading accounts for as much as 70 per cent of daily US share trading, up from about 30 per cent a few years ago.

Among the largest of the traders are hedge funds Citadel Investment Group, DE Shaw & Co. and Renaissance Technologies. Meanwhile, automated brokerages including Getco, Hudson River Trading, Wolverine Trading and RGM Advisors are active.

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