Understand high-frequency trading terms

Investors’ interest in high-frequency trading (HFT) is high, which is important for industry professionals to understand the terminology of high-frequency trading. Many HFT terms originated in the computer network/system industry, which is expected considering that HFT is based on an incredibly fast computer architecture and state-of-the-art software. We briefly discuss the following 10 key HFT terms that we believe are essential for understanding this topic.


Locate computers owned by high-frequency trading companies and proprietary traders in the same place where the exchange’s computer server is located. This allows high-frequency trading companies to understand stock prices instantly before the other investing public. Hosting has become a profitable business for exchanges, and they charge high-frequency trading companies millions of dollars in “low-latency access” privileges.

As Michael Lewis explained in his book flash, The huge demand for hosting is the main reason why some stock exchanges have greatly expanded their data centers. The old New York Stock Exchange building occupies 46,000 square feet, and the New York Stock Exchange data center in Mahwah, New Jersey is almost nine times larger, reaching 400,000 square feet.

Flash transaction

A type of HFT transaction in which the exchange “flashes” information about buying and selling orders from market participants to the HFT company for a fraction of a second, and then provides the information to the public. Lightning transactions are controversial, because high-frequency trading companies can use this information advantage to trade before pending orders, which can be interpreted as preemptive transactions.

U.S. Senator Charles Schumer urged the U.S. Securities and Exchange Commission to ban fast trading in July 2009, saying that it had created a two-tier system where privileged groups received preferential treatment, while retail investors and institutional investors were at an unfair disadvantage and were Deprive them of fair prices for transactions.


The elapsed time from signal transmission to reception. Since lower latency means faster speed, high-frequency traders spend huge sums of money to obtain the fastest computer hardware, software, and data cables in order to execute orders as quickly as possible and gain a competitive advantage in trading.

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The biggest determinant of delay is the distance the signal must travel or the length of the physical cable (usually optical fiber) that transmits data from one point to another.Since the light in the vacuum travels at a speed of 186,000 miles per second or 186 miles per second, HFT’s servers are located in the exchange and the latency will be much lowerSo it has a trading advantageNot a competitor company located miles away.

Interestingly, no matter where it is located in the switch site, the co-located clients of the switch will receive the same length of cable to ensure that they have the same delay.

Liquidity rebate

Most exchanges use the “manufacturer-acceptor model” to subsidize the provision of stock liquidity. In this model, investors and traders who place limit orders usually get a small rebate from the exchange when they execute the order, because they are considered to have contributed to the liquidity of the stock, that is, they are liquidity “manufacturing” By”.

On the contrary, those who place market orders are regarded as liquidity “takers”, and the exchange charges a moderate fee for their orders. Although the rebate is usually less than a cent per share, the sum of the rebates can be considerable among the millions of shares that high-frequency traders trade every day. Many high-frequency trading companies use specially designed trading strategies to obtain as much liquidity rebates as possible.

Matching engine

The software algorithm that forms the core of the exchange trading system and continuously matches buy and sell orders. This function was previously performed by experts on the trading floor. Since the matching engine matches buyers and sellers of all stocks, it is essential to ensure the smooth operation of the exchange. The matching engine resides on the exchange’s computer, which is the main reason why HFT companies try to be as close as possible to the exchange’s server.

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Refers to the strategy of entering small market ordersUsually 100 sharesTo understand large hidden orders in dark pools or exchanges. Although you can think of ping as similar to a sonar signal from a ship or submarine to detect an upcoming obstacle or enemy ship, in the context of HFT, ping is used to find hidden “prey”.

The method is as follows: The buyer’s company uses an algorithmic trading system to break down large orders into smaller orders, and stably put them in the market to reduce the impact of large orders on the market. In order to detect the existence of such large orders, high-frequency trading companies bid and quote each listed stock in units of 100 shares.

Once the company receives a “ping” (that is, HFT’s small order is executed) or a series of pings warning HFT that there is a large buyer order, it may engage in predatory trading activities to ensure its almost risk-free profit at the expense of the buyer , The buyer will eventually receive an unfavorable price due to its large order. Pinging has been compared to “bait” by some influential market participants because its sole purpose is to lure large order institutions to show their hands.

Point of existence

The point where the trader connects to the market exchange. In order to reduce delays, HFT’s goal is to get as close as possible to the point of existence. See also “Co-location”.

Predatory trading

The trading practices adopted by some high-frequency traders obtain almost risk-free profits at the expense of investors. In Lewis’ book, the IEX Exchange attempts to combat some of the darker HFT practices, identifying three activities that constitute predatory trading:

  • “Slow market arbitrage” or “delayed arbitrage”, in which high-frequency traders take advantage of small price differences in stocks between various exchanges for arbitrage.
  • “Electronic Leading”, which involves the HFT company ahead of the exchange’s large customer orders, acquiring all the offered stocks on various other exchanges (if buying orders) or reaching all bids (if buying orders), and then turning them around Sell ​​to (or buy from customers) and pocket the difference.
  • “Rebate arbitrage” involves HFT activities, which attempt to obtain liquidity rebates provided by exchanges, but do not really contribute to liquidity. See also “Liquidity Rebate”.
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Securities Information Processor

This technology is used to collect quotes and transaction data from different exchanges, organize and integrate these data, and continuously publish real-time quotes and transactions of all stocks. SIP calculates the National Best Bid and Offer (NBBO) of all stocks, but due to the huge amount of data, it must be processed and has a limited delay period.

The delay of SIP when calculating NBBO is usually higher than that of HFT company (because the latter’s computer speed and co-location speed are faster), this is the difference in delayLewis estimates it will occasionally reach 25 millisecondsThis is the core of predatory high-frequency trading activities.The Consolidated Tape Association supervises SIP for New York Stock Exchange securities, and UTP plans to do the same for Nasdaq stocks.

Smart router

The technology to determine which exchanges to send an order or transaction to. The smart router can be programmed to send large orders (after they are broken down by the trading algorithm) for cost-effective transaction execution. Smart routers like sequential cost-effective routers can direct orders to dark pools and then to market exchanges (if not executed in the former), or to exchanges that are more likely to receive liquidity rebates.

Bottom line

In recent years, high-frequency trading has been making waves (to use a mixed metaphor). But regardless of your opinion on high-frequency trading, familiarity with these HFT terms should enable you to better understand this controversial topic.


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