In skating over thin ice our safety is in our speed.
—Ralph Waldo Emerson
As we delve into the subject of high-frequency trading, we must first clarify a number of important topics. Foremost among these is the difference between high-speed trading and high-frequency trading. These two concepts are conflated almost continuously by the press, by regulators, and even by reasonably savvy investors. And it is understandable, because the first, which is necessary and inevitable, gives rise very naturally to the second. So high-speed trading and high-frequency trading are cousins, but not synonymous.
High-speed trading is also known as low-latency trading. It refers to the need, on the part of various types of traders, to access the markets with minimal delays, and to be able to act on decisions with minimal delays. In this chapter, we will address why speed is important for many kinds of traders, far beyond HFTs, and also what the sources of latency are and how they can be addressed.
Speed has always, throughout the history of any marketplace, been an important part of separating weaker competitors from stronger ones. There is a good, self-evident reason that equity trading firms and brokerage houses established themselves near the exchanges in New York, and that futures trading firms located themselves near the exchanges in Chicago. The same thing can be found in almost every market center in almost every instrument class around the world. Physical proximity ...