Algo's and HFT

Last week, the Trading Pitt hosted speaker Tim James from Thomson Reuters.  He gave us a fantastic presentation about the basics of algorithmic trading and HFT.  Before the presentation, all I really knew about these types of trading was that they were my enemy as a retail trader.  They were fast, ruthless systems that ate traders like me for lunch.  Well, my opinion has changed a little.

Even though it has a bad connotation in the trading world, algos aren't necessarily out to screw over small traders like us (HFT is a different story).  They are very useful for things like managing large orders and getting better entries.  Algorithms do not necessarily need to be 50,000 lines of code long either.  Its possible to make an effective automated system in only a few lines.  Of course, an ultra-simple automated system may will have a hard time profiting in complex market environments like the ones we have today.  Institutions invest years of research and millions of dollars into their system infrastructure and development, but traders like you and me can still create a profitable algo if you know where to start.  NinjaTrader, Interactive Brokers, and FXCM are a couple of brokers that offer and APIs, so check them out if your interested.  Even if your algorithm fails, being able to write and implement a partially or fully automated trading system will be great if you plan on working in the industry someday.  It will also help your understanding of how systems like these work, and that can give you an edge when you're trading against them.

While normal algorithms usually do not garner much hate from traders, HFT (High Frequency Trading) systems do.  These are the ultra fast, low-latency systems that use their speed and direct market access to make thousands of small trades a day.  Many HFT's profit from market making and arbitrage.  Unlike algorithmic systems, most retail traders will have a difficult time making an HFT.  High frequency systems rely on their speed to place orders before others even see the quote, and this requires the fastest computers and the fastest connections to the market.  Its definitely not cheap.

Even if you have no desire to use an automated trading system, its important to understand them because its what your trading against now and what you will be trading against in the future.  Thats all I have for today, this will probably be my last post for a little while, finals are coming up.  Good luck, follow your rules, and be smart.