Chapter 2. Evolution of High-Frequency Trading

Advances in computer technology have supercharged the transmission and execution of orders and have compressed the holding periods required for investments. Once applied to quantitative simulations of market behavior conditioned on large sets of historical data, a new investment discipline, called "high-frequency trading," was born.

This chapter examines the historical evolution of trading to explain how technological breakthroughs impacted financial markets and facilitated the emergence of high-frequency trading.


Among the many developments affecting the operations of financial markets, technological innovation leaves the most persistent mark. While the introduction of new market securities, such as EUR/USD in 1999, created large-scale one-time disruptions in market routines, technological changes have a subtle and continuous impact on the markets. Over the years, technology has improved the way news is disseminated, the quality of financial analysis, and the speed of communication among market participants. While these changes have made the markets more transparent and reduced the number of traditional market inefficiencies, technology has also made available an entirely new set of arbitrage opportunities.

Many years ago, securities markets were run in an entirely manual fashion. To request a quote on a financial security, a client would contact his sales representative in person or via messengers ...

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