Chapter 3. Overview of the Business of High-Frequency Trading

According to the Technology and High-Frequency Trading Survey conducted by FINalternatives.com, a leading hedge fund publication, in June 2009, 90 percent of the 201 asset managers surveyed thought that high-frequency trading had a bright future. In comparison, only 50 percent believed that the investment management industry has favorable prospects, and only 42 percent considered the U.S. economy as having a positive outlook.

The same respondents identified the following key characteristics of high-frequency trading:

  • Tick-by-tick data processing

  • High capital turnover

  • Intra-day entry and exit of positions

  • Algorithmic trading

Tick-by-tick data processing and high capital turnover define much of high-frequency trading. Identification of small changes in the quote stream sends rapid-fire signals to open and close positions. The term "high-frequency" itself refers to fast entry and exit of trading positions. An overwhelming 86 percent of respondents in the FINalternatives survey thought that the term "high-frequency trading" referred strictly to holding periods of one day or less. (See Figure 3.1.)

Intra-day position management deployed in high-frequency trading results in considerable savings of overnight position carrying costs. The carry is the cost of holding a margined position through the night; it is usually computed on the margin portion of account holdings after the close of the North American trading sessions. Overnight ...

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