Chicago Fed :Controlling risk in a lightning-speed trading environment

Discussion in 'Professional Trading' started by ASusilovic, May 2, 2010.

  1. A handful of high-frequency trading firms accounted for an estimated 70 percent of overall trading volume on U.S. equities markets in 2009. One firm with such a computerized system traded over 2 billion shares in a single day in October 2008, amounting to over 10 percent of U.S. equities trading volume for the day. What are the advantages and disadvantages of this technology-dependent trading environment, and how are its risks controlled?

    A small group of high-frequency algorithmic trading firms have invested heavily in technology to leverage the nexus of high-speed communications, mathematical advances, trading, and high-speed computing. By doing so, they are able to complete trades at lightning speeds. High-frequency algorithmic trading strategies rely on computerized quantitative models that identify which type of financial instruments to buy or sell (e.g., stocks, options, or futures1), as well as the quantity, price, timing, and location of the trades. These so-called black boxes are capable of reading market data, transmitting thousands of order messages per second to an exchange, cancelling and replacing orders based on changing market conditions, and capturing price discrepancies with little or no human intervention. The TABB Group, a financial markets research firm, estimates that algorithmic trading in the U.S. equities markets grew from 30 percent of total volume in 2005 to about 70 percent in 2009 and that 2 percent of the 20,000 trading firms in the U.S. initiate these transactions.2 These firms made about $21 billion in profits during 2008.3 Many of them are based in Chicago and are staffed by former floor traders of the city’s major exchanges—the Chicago Mercantile Exchange and the Chicago Board of Trade (both now parts of the CME Group) and the Chicago Board Options Exchange.
  2. 1) There are no disadvantages. It's all good.
    2) It's also good that the "hub" of the activity is Chicago and not anywhere else.
    3) The (CBOT)/CME Building should have 110% occupancy. :cool: