High frequency trading (HFT) firms are engaged in some of the most sophisticated – and non-traditional – of all algorithmic trading. Latency arbitrage – using a speed advantage to generate profits, a legal activity to various degrees – is one of the key components that drives success of certain strategies. Larry Tabb, founder and research chair at the TABB Group, explains in the report how HFT firms manage risk and profitability. In a January 19 report reviewed by ValueWalk, Tabb also tackles the hot button issue of how institutional investors should and should not address HFT.

High frequency trading
Photo by AV Hire London

Report shows what it takes to compete with the high frequency trading “big boys”

The TABB report, “Speed: Why It Matters And What Can Be Done,” takes apart key issues in HFT as it relates to firm profitability, electronic market making, proprietary trading and traditional long-only investing.

For HFT firms, the examination of how other firms are generating profitability using new technology to provide an edge might be meaningful. For traditional market makers or proprietary trading firms who don’t have the multi-million yearly budgets to engage in speed arbitrage, the report opens up how the system works and where they might fit in. For institutional investors concerned about not succumbing to a high frequency trading losses, the report focuses them on one core issue.

The report identifies the key performance drivers needed to succeed in today’s highly fragmented electronic marketplace, and delivers insight on how to stay one step ahead in the digital world.

Success in high frequency trading is built in large part on seven key technical performance drivers that “must be managed appropriately to compete with the big players in the space.”

Understanding the primary performance drivers in high frequency trading

Perhaps the first component on the list is also one of the most expensive recurring overhead costs.

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