An Introduction to High-Speed and High-Frequency Trading*

I'm so fast that last night I turned off the switch in my hotel room and was in bed before the room was dark.

—Muhammad Ali

In early 2009, with markets fresh off of a harrying near-Depression experience, news reports began to circulate that among the few winners in financial markets in 2008 was a new breed of trading firms—so secretive as to make quant trading shops look like glass houses—called high-frequency traders (HFTs). It didn't take long for some in the press, political and regulatory circles, and even in the financial industry to begin telling a highly biased, basically fictional tale about high-frequency traders.

Following these stories (which immediately prompted a chorus of cries of “no fair”) came an unfortunate incident involving a programmer, Sergey Aleynikov. Aleynikov had left Goldman Sachs to join a then-newly launched HFT firm called Teza (which itself was formed by former Citadel traders). He was arrested in early July 2009 and accused of stealing code from Goldman to bring with him to Teza. What was most alarming to the public about this case had nothing to do with Aleynikov, Goldman, or Teza (intellectual property theft cases are almost never of interest to the broader public). The prosecuting attorney—in an effort to add weight to Goldman's allegations—said that the software that was allegedly stolen could be used to “manipulate markets in unfair ways.”1 This was eye-catching for many, ...

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