HomeEconomyWhat is high frequency trading? quick view

What is high frequency trading? quick view

What is high-frequency trading? High-frequency trading (high-frequency trading, also known as HFT) is a trading method that uses a powerful computer program to complete a large number of orders in a fraction of a second. It uses sophisticated algorithms to analyze multiple markets and execute orders based on market conditions. Often, traders with the fastest executions are more profitable than those with slower executions.

There is a hedge fund on Wall Street, Virtu Financial, which is one of the largest high-frequency trading and market makers in the world. It once achieved a loss of only 1 day in 4 years, so how did it do it? How does high-frequency trading “steal” retail investors’ money? The stock market has been up and down recently, but it is more conducive to the company to make money. Today’s video will introduce the quantitative strategy of this company in detail. It is full of dry goods and will definitely be very helpful for your investment. Let’s start.

First of all, you need to understand 3 concepts: 1. Market makers who provide market liquidity: constantly quote the buying and selling prices of certain securities to public investors, and accept public buying and selling requests at this price, and use its own There are funds and securities that trade securities with investors.

The second is high-frequency trading, which uses powerful computers to process large numbers of orders at extremely high speeds.

Then the last one is the concept of milliseconds: 1 second = 1000 milliseconds, 1 millisecond (ms) = 1000 microseconds (us). A big piece of news travels from the White House to New York 2.1 milliseconds faster than it does to Chicago, because that’s the time it takes for light to travel 391 miles from the White House to Chicago.


The fund’s founder, Vincent Viola, is one of the leaders in electronic trading in the United States. He is a graduate of West Point Military Academy and has served as Chairman and Chairman of the New York Mercantile Exchange NYMEX. Founded Virtu in 2008.

Virtu is one of the largest high-frequency trading and market makers in the world, making money from various financial services, providing quotes and trading of investment products such as stocks, options, etc. on more than 230 exchanges, markets and dark pools. Use big data-based high-frequency trading strategies to trade large numbers of securities every day and make money by profiting on the spread of each trade (that is, the difference between the bid and ask prices).

Virtu went public in 2015 under the U.S. stock code VIRT. At that time, it raised $300 million. Underwriters include Goldman Sachs, JPMorgan, and Citigroup. After listing, Virtu continued to expand its business. In 2017, Virtu acquired Knight Capital, which was on the verge of bankruptcy. At that time, Knight Capital bought and sold millions of shares without thinking due to a system transaction failure, causing huge market volatility. : 148 stocks were affected, with losses of up to $440 million in 45 minutes.

Virtu lost only one of the nearly 1,238 trading days between 2009 and 2014. During 252 trading days in 2014, Virtu Financial once again set a record of “zero loss days”.

Virtu claims that such a proud record is based on risk control strategies and techniques. Taking advantage of the speed and the exchange system, trading ahead of the market, earning a little bit each time, billions of times, the annual net profit will be hundreds of millions of dollars.


So let’s take a look at light-speed trading, HFT, and high-frequency trading between milliseconds. high-frequency trading: is an automated trading platform used by large investment banks, hedge funds and institutional investors that utilizes powerful computers to process large numbers of orders at extremely high speeds. Leading financial products automatically complete a large number of buy and sell orders within a hundredth or a thousandth of a second, as well as cancel orders, and gain profits from extremely small stock price fluctuations. Reasonable high-frequency trading is an effective trading tool for hedging arbitrage.

In the U.S. market, with the growing scale of hedge funds, “high-frequency trading”, which accounts for a large proportion of quantitative investment, has developed very well. Eighty percent of all trades in the U.S. are now carried out by high-frequency computers, and these algorithms trade faster than the blink of an eye. Take advantage of speed and systems to make ahead-of-the-market, multi-billion trades with the goal of making only a little, or even a few cents per trade, but huge profits due to the sheer volume of trades , which is basically zero risk.

The famous Professor Laughlin believes that as long as you maintain a win rate of more than 51% per trade, it is almost impossible to lose money in the long run. If you trade 10,000 times a day, the probability of profit on that day will reach 97.8%; if you trade 100,000 times a day, the probability of profit will be close to 100%. “Virtu Financial’s losses in the previous trading day should be the result of system error or human error.”


So let’s take a specific example. Although the time interval between order placement and execution is less than one second, many things happen in this one second. A stockbroker has sold your order information to a high-frequency trading firm. For example, if you want to buy 50 shares of a stock at $100, the high-frequency trading company quickly buys 50 shares at $100, and then places a sell order at $100.01, then you need to buy at $100.01 this stock. That is, you paid 50 * $0.01 more = $0.50, but the HFT firm took this profit without any risk. High-frequency trading firms have no positions at the close of the stock market, thus avoiding a lot of uncertainty risk and no position risk.

Having said that, I believe everyone understands Virtu’s profit model. Those who play mahjong must be accompanied by earning money, and those who open a mahjong hall and collect rent will never accompany them. Because he did not participate in gambling, it is impossible for those who participated to stay with him forever.

Quantitative trading in quantitative hedge funds is to analyze and mine a large amount of data through knowledge of statistics, mathematical computers, etc., build a quantitative investment model, and then strictly follow this strategy. So, when a quantitative hedge fund meets a small retail investor, it is like a modern soldier meets a Stone Age man.

Because even talented investors make mistakes and mistakes, it is difficult to win long-term in complex markets based on qualitative human analysis alone. People’s behavioral deviations often lead us to make irrational investment decisions, regardless of whether you are an ordinary person or a genius. The biggest feature of quantitative investment is to emphasize discipline, that is, to overcome the influence of investors’ subjective emotions.

Ordinary investors hold shares in units of years and months or days, but professional traders trade in milliseconds; today, trading firms are willing to pay for their own servers and stocks in order to be a few milliseconds faster than others The exchange server is installed in the same building, just to shorten the transmission distance of the fiber.

Goldman Sachs previously approved a three-year plan to overhaul its stock trading platform at a cost of more than $100 million. One goal is to improve Sheng’s performance on trade orders, which have a shorter duration for trade orders lasting one microsecond to about 30 seconds, which Goldman has struggled to process in the past.

Goldman Sachs hopes to roll out this technology on a global scale, so the speed of the institution will certainly be greatly improved. They also recruited more researchers and more quantitative analysts to improve their algorithms.

This requires very cutting-edge technology, such as wireless microwave transmission, which only physicists can understand. It enables Virtu to reduce the one-way time lag between Illinois and New Jersey to 4.7 microseconds.

flash crash

However, when the stock market is trading at the “speed of light”, the various uncertainties of profit and loss will be greatly increased. Previously, some people pointed the finger at high-frequency trading when there were several “lightning fluctuations” caused by “technical failures” in the global stock market. For example, in the flash crash of 2010, investors watched as the market value of $1 trillion evaporated in 20 minutes. why? The answer is still automated trading. A series of events triggered certain procedures, resulting in a one-day surge in stock trading to double the daily average, with 1.3 billion shares traded in 10 minutes.

Critics believe that the existence of a large number of high-frequency trading will not only increase the opacity of the market, but also violate the “fair and moral bottom line” of the financial trading market, put ordinary investors at an unfair disadvantage, and there is a risk of system collapse at the technical level. , it is easy to cause the financial market to have to face another “technical black swan event” with a high probability of occurrence in addition to natural disasters and economic crises.

The more turbulent, the more money you make

As we mentioned earlier, when the stock market fluctuates, it is the favorite market of high-frequency trading companies. Why?

High-frequency trading likes the ups and downs of the market most, and at the same time, the trading volume is enlarged. Because when the market is more volatile, the market demand for liquidity will increase, and in turn, there will be more trading and profit opportunities. During periods of high volatility, such as last March, bid-ask spreads widened, creating profit opportunities for companies like Virtu.

According to public information, in 2008, 70% of investors who used traditional low-frequency trading suffered losses, and some fund institutions were even struggling to survive. Profits have nothing to do with market performance. On the contrary, in a bull market, high-frequency trading is not very profitable, and it is more profitable than a buy-and-hold trading strategy. Only when the market is chaotic can high-frequency trading find a way to make money when others don’t know what’s going on.

At present, Virtu is more worried that it will not be able to maintain the same level of profitability in 2021 as last year. With the widespread distribution of a vaccine, markets may not return to the wild swings of the past. As a result, high-frequency trading firms have struggled for revenue and profits during these times. Because low volatility will hurt the profitability of market makers.

While most of Virtu’s revenue comes from market-making, the company has been working to expand its other business unit in recent years to change its reliance on this volatile revenue stream. That is, the executive services division that they have carried out over the past few years to diversify their revenue. Execution Services executes trades on behalf of large institutional investors for a commission.

Virtu’s full-year 2020 adjusted earnings per share totaled $5.76 and adjusted net trading income was $2.3 billion, or $9 million per day.

In terms of valuation, VIRT currently trades at a forward price-to-earnings ratio of 6.18. That’s a lot of room compared to the industry’s average forward price-to-earnings ratio of 14.96.

At the end of the video, I recommend a book and a movie to everyone, and introduce the book [flash boys: a wall street revolt] of high-frequency trading; the movie is [Hummingbird Project], which tells that there are various people in the industry. The idea is to gain a competitive advantage, just in order to break the transmission time of 17 milliseconds, some people dig optical fibers, and there are artificial microwave towers.



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