Thursday, August 27, 2009

Inside A High Frequency Trading Firm

Scott Patterson at WSJ does a nice job of profiling how one of the largest high frequency firms operates:
One of the biggest players in the hot area of high-frequency trading is one of the least known.Getco LLC, a private company with fewer than 250 employees, often accounts for 10% to 20% of the daily trading volume of many U.S. stocks, the company has said, including highly traded names such as GeneralElectric Co., Oracle Corp. and Google Inc....

Unlike traditional Wall Street firms, the company holds relatively few securities by the time markets close for the day. Nor does it use much leverage, or borrowed money, to amplify the effects of its trades.

Since it constantly buys and sells, it can move in and out of hundreds of millions of dollars' worth of securities every day with a relatively small amount of capital. It favors shares that are the most heavily traded.

During the trading day, it can lose money if it accumulates large positions and the market suddenly moves against it, a risk it works to minimize by trading quickly in and out of markets, as well as through hedging strategies.

For example, if Microsoft shares are trading in range of $24.09 and $24.12, an investor may place an order to sell Microsoft for no less than $24.10. On the other side of that trade could be Getco with an order to buy at $24.10. Getco likely also will have an offer to sell Microsoft for $24.11.

If the trade works, Getco will make money on that tiny spread.Sometimes they don't; the challenge then is to get out as quickly as possible. In this case, if it accumulates a large amount of Microsoft stock at $24.10, however, it will stop buying and offer to buy and sell at lower prices.
This is what Goldman Sachs would like you to think they are doing. However. I suspect that, although this is some of what they do, there is also some kind of line that gives Goldman a peek at trades before anyone else sees them

1 comment:

  1. Awesome stuff- reminds me of the book "Faster" by James Gleick of "Chaos" fame.

    We live in exponential times, and soon enough, someone will HFT the HFT'ers. Maybe you could aggregate all the HFTs with a quantum computer and front-run them. Or work for Goldman.