High Frequency Trading Strategies
Tue, 11 Jan 2011 03:53:00 GMT
I was doing a bit of research into HFT and algorithmic trading on the web this morning, and I came across a really useful “cheat sheet” on high frequency trading strategies.
HFT and algo trading can get a little confusing sometimes, so this chart put together by Brandon Rowley (who runs an excellent blog at Trading Wall Street Investments) is a really useful resource, explaining in clear terms what the six main strategies of high frequency trading are. He splits these HFT strategies into three categories, namely Liquidity Provision, “Trading the Tape” and Statistical Trading.
The two subcategories of Liquidity Provision on Rowley’s chart are Market Making, where designated firms (such as Getco for example) commit to providing two-way bid/offer prices in a range of securities, and Rebate Trading. Market makers profit both from the spread between their posted bid and offer and from rebates the exchange offers to them for providing liquidity. To gain the highest rebates, they are generally obliged to provide a two-way price for an agreed minimum size in their chosen securities, for an agreed minimum time.
Rebate Traders are firms who are not designated market makers, but who can still collect rebates at some exchanges by providing liquidity through posting single-sided bids or offers.
Trading the Tape
Trading the Tape is split into two types of trading in Rowley’s chart: Filter Trading, where stocks are monitored for significant changes in either price movement or volume; and Momentum Trading, where temporary imbalances exist between supply and demand. An example of a Filter Trade could be when an algorithm buys on the back of a spike in price or volume caused by a breaking news story. An example of a Momentum Trade could be where a liquidity detection algorithm buys when it detects a large buy order entering the market and exits rapidly, selling slightly higher when equilibrium is restored.
Rowley’s final category of strategies is Statistical Trading, again split into two sub-categories, Statistical Arbitrage and Technical Trading. Statistical Arbitrage exploits short-term price differentials across different, but correlated instruments (derivatives and their underlyings for example, or correlated pairs of stocks).
Technical Trading identifies price chart to patterns to determine entry and exit points based upon specific rules.
The chart is a great little resource to keep handy if you are looking to identify or categorise high frequency trading activity. Click on the image to make it bigger (note, you need to be logged in to do this. If you're not registered, click here to register for free)