Chapter 6

Expansion in High Frequency Trading


High frequency trading (HFT) in the futures markets is not a new development. Once the markets started to go electronic—in the mid-1990s in Europe and in the early 2000s in the United States market participants (a majority of them ex-floor traders) quickly realized that they would need to translate their trading style from a pit environment to an electronic platform style in order to stay competitive. Pit trading was all about watching the trading flow and how much size was on the bid and to offer when the price point changed, and electronic trading is no different. Live market data needs to be consumed at a rapid pace to predict future price movements, and the ensuing trade decision needs to be made as quickly as possible. Other types of traders use similar ways of accessing the markets, but their time horizons can last longer. As such, the high speed trading market has two silos: a liquidity provision model that is dominated by professional proprietary trading shops, and a model-based, customer-driven order flow that uses execution algorithms to enter and exit positions. Approximately 25% of overall major global futures volume is derived from professional high frequency traders. This trend is only expected to increase as additional professionals for other asset classes gravitate to futures and increase participation for other developing nations around the globe. Model-based, customer-driven order flow represents approximately ...

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