Prof. Philip Treleaven, Director at UCL for Financial Computing, and UCL Professor of Computing, has written an interesting article on High-Frequency Trading. Below are some key aspects of the article, as well as the the link to the full document. Prof. Trelaven will be speaking at High-Frequency Trading Leaders Forum 2013 London.
According to Charles Perrow, there is such a thing as “Normal Accidents”. With complex and little understood system characteristics multiple and unexpected interactions of failures are inevitable in complex systems. Unexpected and complex interactions between faults that are tolerable individually can lead to catastrophes. Tight coupling allowing little opportunity for mitigation or defense once a fault occurs.
There are many aspects to High-frequency Algorithmic Trading Systems. Algorithmic Trading Systems are becoming increasingly complex and the market interactions not well understood. Algorithm behavior is the interaction and risk of individual algorithms and is also not well understood. Furthermore you can consider, Algorithm ecology, which is reduction in diversity and this can be potentially detrimental to the financial markets. Another essential aspect to High- Frequency Trading is Algorithms deployments, which are systems deployed with minimal testing. To add further complications, financial regulation often times do not understand the complexity of the the algorithms being used or there potential impact on the the financial markets.
When attempting to understand High-Frequency Trading there are several definitions that must be understood clearly. Algorithmic Trading (AT) is any form of trading using sophisticated ‘algorithms’ to automate all or some part of the trade cycle. Systematic Trading similarly, any form of trading using sophisticated ‘algorithms’; users refer to ‘algorithmic trading’ just to trade execution. High-frequency Trading (HFT) execution of computerized trading strategies is characterized by extremely short position-holding periods involving trading speeds in excess of a few milliseconds. Ultra High-frequency Trading or low-latency trading refers to HFT execution in sub-millisecond times through co-location of servers at exchanges, direct market access, or individual data feeds offered by exchanges and others to minimize network and other types of latencies.