As the temperature continues to rise this summer so too has the debate around high frequency trading but defining high frequency trading and its effect on the financial markets is no easy task.
Some liken it to simple algorithmic trading; others define as specific ultra low-latency trading strategies.
Eric Karpman, CEO of Trading Strategy Group and Luxoft Trading Solutions, says high frequency trading involves immediate, real-time data analysis, which leads to automatic trading decisions.
“It means analyzing what is happening in the market on the spot, without the time to store the data in a database, doing automatic tick by tick analysis and making decisions based on that,” he adds.
Karpman’s Trading Strategy Group is a boutique asset management and advisory firm that runs quantitative strategies for its own books and also consults and advises other shops through its association with Luxoft Trading Solutions.
Karpman says his use of high frequency trading strategies are mostly around arbitrage situations. “We also recently have gone into sentiment trading, or analyzing news and reactions to the news,” he says. “All of the data is stored in a very fast algorithm and once a new piece of data or news comes in a decision is made in milliseconds on how to act on the news.”
In other words, as soon as data hits it will trigger the algorithm and automatically shoot an execution order. “It’s the optimization of the whole process,” says Karpman.
He also sees high frequency trading around pairs trading strategies. “If we see certain movement from one security to another and we know universally they should have some kind of fixed spread between them and we see a large deviation then we make a move,” Karpman explains, adding that these types of trades are easier to track because there isn’t a lot of data to analyze or time to take in analysis.
“Whenever we can do the prep work before hand and then just react on the information as it comes in from the market, those are the strategies I would characterize as high frequency- and they are always active. If there is a little piece to grab we’ll grab it,” he says.
As far as the controversy brewing over high frequency trading and its market impact, Karpman says while he thinks it could be controlled so traders aren’t taking advantage of others, it is simple technology evolution and how well a particular algorithm can work, or be optimized. “It does add liquidity and it does provide price reduction,” he notes.
“We’re working in trading environment with smaller spreads and just trying to still make money on those small spreads,” he explains. “We have to come up with ways to be creative and be more optimized to take advantage of the environment – you have to adjust to the changing environment.”
For those that can’t keep up, Karpman says there are always other markets. “If you think certain markets are penetrated by big guys with smart machines then you can move on to other markets.”