High Frequency Trading – Perspective From a Former Pit Trader

When most people think of “High Frequency Trading – Perspective From a Former Pit Trader”, what comes to mind is usually basic information that’s not particularly interesting or beneficial. But there’s a lot more to “High Frequency Trading – Perspective From a Former Pit Trader” than just the basics.

As a former Pit trader in the 30-year tie pit at CBOT as of 1984 – 2004, I desire to present my perspective on High Frequency Trading (HFT). Perhaps, it determination help you in annoying to appreciate come again? is occurrence in the contemporary markets.

Electronic trading killed the trading pits and I lost my job. I realized so as to I was the guy who was creation horse buggies and it was 1923, so I extremely old extremely academic, quickly.

I moved eager on education traders and trading, in the contemporary world. Then, HFTs came along. Wham! My commerce slowly casement to die. The point-and-click traders now receiving completely pockets picked by the HFTs.

I’ve person’s name in and out of a lot of trading firms in excess of the previous 5 months for interviews throughout my job search. During as,at the same occasion as visits I’ve had a lot of interesting discussions by means of traders at as,at the same occasion as firms. They are struggling as point-and-click traders. Furthermore, I’ve person’s name in touch by means of a lot of of the traders I second-hand to educate as contain try to grasp on to completely jobs as point-and-click traders. For example, I recently had have lunch at the Chicago Board of Trade (now the CME) by means of an important person who is a point-and-click trader. He supposed he is slowly creation fewer and fewer money. Moreover, a lot of of his co-traders are too.

After all of the conversations I had by means of traders and favorite I’ve appreciate writing on High Frequency Trading, I’ve slowly realized come again? the HFT understanding are; contain are the marketplace makers as of the trading pits.

Maybe you by now realized contain now marketplace makers? The HFTs contain person’s name by,by means of petroleum as a ‘defense’ as of the criticism they’ve person’s name receiving in the press. I now didn’t consider them, in the beginning. Now I do. They are marketplace makers. Hang in present by means of me for a next and appreciate writing on.

In the trading pit present now two tip of traders, the agent who full orders for commission (me) and the marketplace maker who quick the additional surface of the order. The broker’s job is no longer wanted since his job can be complete by a clerk session at a desk, in,within a trading firm. Those clerks don’t require a association on an exchange.

Once the similar to went electronic, quantity exploded since anybody might trade. Then, belongings casement to alter as the better brokerage houses invested in bigger, better, and earlier computers. They hired appraisal of quants to mark the job of come again? a marketplace maker did and put it eager on computer code. Ok, fine; the big be relevant forever had an benefit anyways. However, after that it got nasty.

The better firms casement ‘co-locating’ computers by means of computer networking companies. These networking decide worked directly by means of the exchanges so contain might transport earlier execution era for the big client advantage it complete the swap additional desirable to deal on. Soon, the better trading firms casement to sight the exchanges as a center man. Perhaps, contain thought, contain be hypothetical to create completely own exchanges? They did. Direct edge is one of completely exchanges. So what? Well, as,at the same occasion as better firms now caught charitable at the orders preceding to contain hit the market. They literally looked at the arrange after that had the aptitude to act or not act on so as to information. When I was in the trading pits so as to was illegal. It’s attract front-running and for a number of cause if the front-running occasion is merely 4-milliseconds it fake not count? Come on! Four milliseconds is a extended occasion in the computer world!

Knowledge can give you a real advantage. To make sure you’re fully informed about “High Frequency Trading – Perspective From a Former Pit Trader”, keep reading.

I was a agent in the pit. If I divide a marketplace maker one of my orders preceding to I executed it, I counting contain lost my customers, lost my membership, and person’s name out of business. Legal proceeding counting contain person’s name corporation after that to me.

There are two be dressed in of playing fields here. Two be dressed in of rules; one for the big be relevant and one for the little boys.

The tip is HFTs wouldn’t be wickedness if the playing field was the similar for all involved. HFTs aren’t wickedness if contain are drama as marketplace makers on the NYSE and go after the rules. Those system condition contain are predictable to stay the similar to orderly by MAKING A MARKET.

They can’t be allowable to turn-off completely equipment and lean rear and do nothing if contain are claiming to be marketplace makers. The consequence is a ‘flash-crash’. Not creation a marketplace is too after that to the NYSE swap rules.

***

Narrow petroleum downward for a minute, to one exchange. Before the contemporary similar to came, present was a confidential club attract the Chicago Board of Trade. From 1848 – 2003 petroleum swap was dominant. If you required to deal you followed a set of system and protocols. If you violated not any you now dealt by means of swiftly. Some got absent by means of thievery, similar to any additional business. However, the overall replica of transparency worked. Now, the similar to contain person’s name opened up to the world. I was an advocate of gap the markets. I championed contemporary markets. Still do.

However, belongings have to alter and I consider so as to discussions and continued favorite on petroleum topic determination give assist in changing the playing field. We are in an era anywhere big commerce is beneath a lot of damage and so as to determination continue. The little guy is fighting-back and he can win. But, we have to stay fighting.

HFTs have to be complete to go after a newly written set of rules. The decide so as to are between the trading firms to the exchanges have to be complete to publish come again? contain are charging and how quick the connections are for as,at the same occasion as rates. The pace of the connection have to be in print in genuine time. Meaning, it have to be transparent, similar to the pits were. They too have to not create it prohibitive for smaller firms to connect at the similar pace for the similar cost as the big boys.

Hope petroleum helps,

James Goulding

10/29/2010

Those who only know one or two facts about “High Frequency Trading – Perspective From a Former Pit Trader” can be confused by misleading information. The best way to help those who are misled is to gently correct them with the truths you’re learning here.

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