HFT Arms Race – Developing technology to match your strategy at The Trading Show Chicago
Benjamin Van Vliet of the IIT Stuart School of Business opened up for Peter van Kleef by addressing the issue of ethics in HFT. “One of the challenges is overall different professional ethics. Traders have exchange rules, computer engineers have IEEE ethics, and quants have ethics superseded by mathematical truth. Can we derive some ethic that crosses traditional boundaries?” Dr. Vliet then stated, “Taking ethics seriously would minimize the influence of political involvement.”
Peter van Kleef of Lakeview Capital Market Services Gmbh has spent approximately 20 years doing electronic trading. To understand where the edge is coming from, Mr. van Kleef addressed seven major points; market data, market access, development, testing, deployment, setup, and being on top of the latest developments.
Market data is separated between real time and historical data. Mr. van Kleef described the real time resources and their attributes. For instance, the direct exchange gives you fast real time data, feed providers are on shared infrastructures and may experience slight lag, and broker feeds which range anywhere from fast to slow may provide a cost advantage. He also noted that care should be taken when cleaning the data you receive since it is possible to eliminate peak points that would trigger your algorithm.
Market access can be attained through membership on the exchange, collocation to which costs are coming down for these services and when server co-operation is exercised, direct market access, remote access, and direct strategy access i.e., purchasing setups that only require you to provide it the strategies.
Development and testing are crucial to evaluate the utility of your setup and execution. Development options range from in-sourcing to out-sourcing system development, using a proprietary or common language to build the system if in-sourced, and concentrating on the hardware to address speed over the software. Testing has its advantages, but also its constraints. For instance, back testing is good for finding errors but not good for predicting performance. Also, testing requires much effort to rule out potential errors. Live simulations are good for developing intuition, but it is not a reliable source for having confidence in your strategies.
Mr. van Kleef provided three techniques for gaining advantages over your competitors; being smarter and more creative not just faster, being more flexible and adaptive not just focused, and being more efficient and scalable not just bigger. In addition, HFT is considered to be relatively safe where the risk is significantly less than long and medium strategies for firms. This is due to smaller scales differentials being absorbed in the bid-ask spread, risk controls on the exchange, and not entertaining holding risk.
-Original content provided by Safraz Rampersaud, an on-site blogger at The Trading Show Chicago
