High Frequency Trading Flashcards
1
Q
Explain the concept of algorithmic trading with regards to high frequency trading
A
- Also known as automated trading it’s the use of electronic platforms to enter orders
- The algorithm decides on aspects of the order like timing price or volume.
- Orders initiated without human interaction
2
Q
Give me some examples on who uses algorithmic trading
A
- Used by institutional buy-side traders e.g. pension funds and mutual funds to divide large trades into small trades.
- Sell-side traders like market makers use this to generate an execute orders automatically to provide liquidity to the market
3
Q
What are some of the rules and regulations under MiFID II for a firm engaging in algorithmic trading?
A
- Enter into a binding written agreement with the trading venue to make markets for a specific period of time.
- Firm needs to have effective systems and risk controls in place to ensure trading systems are resilient and have enough capacity.
- Must have effective business continuity arrangements to deal with any system failures.
- Ensure systems are tested and monitored.
- Make sure the systems cannot create or contribute to disorderly trading on the market
4
Q
Explain high frequency trading (HFT) in terms of algorithmic trading
A
- 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.
- They look to identify predictable patterns and financial data.
- Trading is short portfolio holding periods (just for a few seconds or milliseconds) and very large volumes.
5
Q
What are the four key high frequency trading strategies?
A
- Market making based on order flow
- Market making based on tick data information.
- Event arbitrage.
- Statistical arbitrage.
6
Q
What are some of the rules and regulations around high frequency trading?
A
- HFT farms will need to store time sequence records of their algorithmic trading systems.
- Need to store trading algorithms for at least five years.
- Monitored by ESMA (European Securities and Markets Authority)