High speed trading brings together sellers of securities through an electronic trading platform and network. The combination of technology, user interface, and dedicated network create a virtual market place. Electronic trading and High Frequency Trading (HFT) has replaced most human trading in global securities markets. Algorithms are the latest advancement in electronic trading.
Algorithms that work well can learn from past trades and make predictions that help traders make better buy and sell decisions. Traders benefit from innovations in technology, but they also get invaluable support from financial industry leaders, such as Rene Kern, Managing Director at General Atlantic, who sits on the board of directors of KCG, a leading trading company.
High Frequency Traders are also called electronic trading firms and market makers. Market makers are known for supplying liquidity, which Investopedia defines as “the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.”
Complex algorithms are used to make and track large orders in milliseconds. The use of these complex formulas is believed to give traders an advantage when making transactions. They allow traders to track trends and price changes before they happen.
The investment firm Renaissance Technologies has created a new tool to compete with high frequency traders and win back some of their time advantage. Their strategy requires the use of algorithms and an atomic clock, the most accurate timekeeper known today. The details of this complex innovation are explained in an article in Fortune:
A non-high frequency trader may place a large order for shares that can only be fulfilled by splitting it into smaller orders at multiple exchanges. Since exchanges are at geographically disparate locations, those smaller orders will be executed at different times—perhaps even milliseconds apart.
Jim Simons, founder of Renaissance, is hoping that his innovation will level the race to the finish line, which means success for all types of traders. He has filed a patent application. The next step is to prove that his technique works, which is an investment in the future of trading.