High Frequency Trading Flashcards

1
Q

Explain the concept of algorithmic trading with regards to high frequency trading

A
  1. Also known as automated trading it’s the use of electronic platforms to enter orders
  2. The algorithm decides on aspects of the order like timing price or volume.
  3. Orders initiated without human interaction
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2
Q

Give me some examples on who uses algorithmic trading

A
  1. Used by institutional buy-side traders e.g. pension funds and mutual funds to divide large trades into small trades.
  2. Sell-side traders like market makers use this to generate an execute orders automatically to provide liquidity to the market
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3
Q

What are some of the rules and regulations under MiFID II for a firm engaging in algorithmic trading?

A
  1. Enter into a binding written agreement with the trading venue to make markets for a specific period of time.
  2. Firm needs to have effective systems and risk controls in place to ensure trading systems are resilient and have enough capacity.
  3. Must have effective business continuity arrangements to deal with any system failures.
  4. Ensure systems are tested and monitored.
  5. Make sure the systems cannot create or contribute to disorderly trading on the market
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4
Q

Explain high frequency trading (HFT) in terms of algorithmic trading

A
  1. a type of algorithmic trading where computers make decisions to initiate orders based on information that is processed quickly than human traders are capable of doing.
  2. They look to identify predictable patterns and financial data.
  3. Trading is short portfolio holding periods (just for a few seconds or milliseconds) and very large volumes.
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5
Q

What are the four key high frequency trading strategies?

A
  1. Market making based on order flow
  2. Market making based on tick data information.
  3. Event arbitrage.
  4. Statistical arbitrage.
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6
Q

What are some of the rules and regulations around high frequency trading?

A
  1. HFT farms will need to store time sequence records of their algorithmic trading systems.
  2. Need to store trading algorithms for at least five years.
  3. Monitored by ESMA (European Securities and Markets Authority)
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