For any firms who are thinking of getting into the high frequency trading (HFT) space, one of the most significant barriers they have to overcome is that of technology. In order to compete with the big boys (i.e. the Wall Street firms with deep pockets) any new players thinking of implementing an HFT system need to make some pretty savvy tech decisions. So if you are in this position, what kind of things do you need to take into consideration?
One of the things you should think about first is taking advantage of services offered by firms already established in the space, such as exchanges, managed services/hosting providers, and even some sell-side brokerage firms. This is smart strategy to lower the cost of entry for new participants. There are other advantages as well.
Many exchanges are now offering rack space in their own data centers to HFT firms who are looking for “co-location” in order to reduce latency down to the lowest levels. This comes down to basic physics. The shorter physical distance an electronic order message needs to travel before it is executed, the faster it will hit a bid or offer on the electronic market. Don’t forget, we are talking in microseconds here, so if you can consistently beat your competitors to the best prices on the order book, you will hold a significant advantage. This is not widely considered out of HFT circles, but within the high frequency trading community, traders know that microseconds can add up to millions of real pounds, dollars, or yen. The better your software and systems and the closer you are to the exchange, the better chance you have for trade execution.
Where it is impossible to take out rack space at the exchange, a number of service providers have now sprung up, providing “proximity hosting”. This is basically a one-stop shop where they will provide not only rack space in a data center very close to the exchange, but also computer hardware, storage and network communications to the exchange itself. This definitely lowers the barriers to entry for new high frequency trading participants.
Many service providers, such as Cisco and BT Radianz for example, are tailoring these services specifically for new high frequency trading firms, providing the entire infrastructure needed to get started, in a completely hosted environment. So the technology barriers are getting lower all the time.
Here is an excellent primer on high frequency trading and the New York Stock Exchange: