High-frequency Trading
In the U.S., high-frequency trading (HFT) firms represent 2% of the approximately 20,000 firms operating today, but account for 73% of all equity trading volume. As of the first quarter in 2009, total assets under management for hedge funds with HFT strategies were US$141 billion, down about 21% from their high. The HFT strategy was first made successful by Renaissance Technologies. High-frequency funds started to become especially popular in 2007 and 2008. Many HFT firms are market makers and provide liquidity to the market, which has lowered volatility and helped narrow Bid-offer spreads making trading and investing cheaper for other market participants. HFT has been a subject of intense public focus since the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission stated that both algorithmic and HFT contributed to volatility in the May 6, 2010 Flash Crash. Major players in HFT include GETCO LLC, Jump Trading LLC, Tower Research Capital, Hudson River Trading as well as Citadel Investment Group, Goldman Sachs, DE Shaw, Renaissance Techologies.
There are four key categories of HFT strategies: market-making based on order flow, market-making based on tick data information, event arbitrage and statistical arbitrage. All portfolio-allocation decisions are made by computerized quantitative models. The success of HFT strategies is largely driven by their ability to simultaneously process volumes of information, something ordinary human traders cannot do.
Read more about this topic: Algorithmic Trading
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“His farm was “grounds,” and not a farm at all;
His house among the local sheds and shanties
Rose like a factor’s at a trading station.”
—Robert Frost (1874–1963)