What’s in your high-frequency trading sandwich?

Hello, it’s Daniel here!

High-frequency trading (HFT) is still an ugly duckling of the financial world. It’s unclear and unfair, they said, the margin is unbelievably tiny, and security is questionable. But wait, most of these statements are prejudiced of those who haven’t dug in.

We’ve had some experience from the infrastructure side, so let us show you one trick or two about HFT underlayer.

There’s no other domain than blockchain for HFT

• Crypto never sleeps, creating constant arbitrage opportunities so that no environment would cover such intensity of signals.

• The “physics” of crypto’s notorious price enables traders to profit from even minor inefficiencies. And to fail, of course. 

• HFT companies can trade across borders without centralized intermediaries slowing them down. Yet. Or still.

Source: The 10 highest-earning HFT Firms in the World

So, how does HFT work?

It uses algorithms to execute thousands of trades in milliseconds, profiting from small price differences. It thrives in markets where speed is critical, like stocks, crypto, and commodities. 

Traders co-locate servers near exchanges to minimize latency, ensuring faster order execution. HFT can be applied by hedge funds, proprietary trading firms, and even crypto traders globally. 

Source: 2024 HFT market overview

Key locations include financial hubs like New York, London, and Hong Kong. While controversial for potentially increasing market volatility, HFT also boosts liquidity and narrows bid-ask spreads.

Our approach to HFT is described below:

The basics are covered. Now, the infrastructure story

So you see, we need a super fast, high-reliable, always-available, data-flashing custom engine. What’s inside of those trading monsters?

• Low-latency networks: Cutting-edge technologies like fiber optics and microwave links minimize order execution delays.

• Custom hardware: High-performance computing hardware, like FPGAs and GPUs, processes data and executes trades rapidly.

• Algorithmic trading software: Complex algorithms analyze market data in real time to identify profitable opportunities.

• Risk management systems: Automated tools manage exposure and compliance, reducing risks from rapid market changes

• Direct market access: Real-time data feeds via APIs allow traders to act on price changes instantly.

• Co-location: Housing servers near exchange data centers can shave milliseconds off transactions, critical for latency arbitrage.

What are the common features of their infrastructures?

Barely scratched the surface of HFT

So now you have more questions than before this email—what are those high-frequency algorithms, what are those custom hardware, etc? And I would love to hear what you discover from your side. 

Join our Web3 pack if you'd like to share insights on the technical and business aspects of HFTs.

Hope your projects are growing well!

BW,

Daniel