What is High Frequency Trading?

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High Frequency Trading refers to the behavior of obtaining information from the market and making decisions faster than other competitors with the upgrade of hardware and algorithms to make profits. The main focus of high-frequency trading is actually not high-frequency, but low-latency. The traders make profit from the market with low-latency. Because this profit model generally buys and sells order in a very short time, every single deal can only make meager profits. This trading model often comes with a large trading volume (requiring a very high trading frequency), and this is the reason why it’s called high frequency trading.

The following are the five definitions of high-frequency trading, which were defined by the US Securities and Exchange Commission (SEC). They briefly explained the characteristics of high-frequency trading that are agile and flexible:

1.      Using ultra-high-speed complex hardware systems to place orders.

2.      Using co-location and directly connecting to the data center.

3.      The average of the time holding the order is very short.

4.      Trading in large amount.

5.      Keeping all the orders clear before the market is closed up every day. (Do not hold the orders overnight).

The advantage of high-frequency trading is based on the speed. The benefits of speed in trading are huge. Taking the market making strategy as an example, high-frequency traders trade with the opposite direction of retail investors. This strategy can provides liquidity to the market, so the exchange will provide a certain amount of remuneration to high-frequency traders. However, retail investors placed the orders based on their prediction of the market. No matter their prediction is going up or down, high-frequency traders must bear certain risks while acting as counterparties. The low-latency technical capabilities come in handy when dealing with the risk. Since the market price is volatile in the short term, the price that has rised up will usually fall down in a short period of time, and the price that has fallen down will also rise up. High-frequency traders can use this price fluctuation to make the order being placed without loss or even making profit. This achieves the purpose of avoiding risks and making profits. It seems to be simple, but in fact, this approach requires extremely high hardware speed.

In order to increase the speed, high-frequency traders' requirements for hardware can be said to be insane. Everyone wants to update their hardware to the latest and fastest version in the market. Normal servers are no longer sufficient. To meet the demand, the high-frequency server has therefore become a necessary weapon in this market.

Generally speaking, high-frequency server manufacturers choose Intel’s latest generation of CPU, corresponding motherboards of the CPUs and memory with low CL value, etc… They use the best materials regardless of the cost, in order to upgrade the latest existing technology to pursue the optimization of speed.

Overclocking is to have the CPU burn its own life in exchange for a faster frequency. This practice will cause the CPU to generate a lot of heat in a short time, so the cooling system has become a new challenge. How to keep the stability of the CPU being overclocked has become an engineer's key focus, and various high-frequency server brands have also extended creative solutions for it.

In addition to the computing speed of the server itself, the transmission speed of packet data in the hardware is also a major focus. The network card has a decisive influence. Currently, Solarflare (acquired by Xilinx) and Exablaze (acquired by Cisco)  Network cards are the mainstream in the market. Higher levels of high frequency traders look for FPGAs or programming chips as options. These choices were made depending on the budget and requirements of the traders.

With fiber optic cables and the highest level of Switches (generally produced by Arista, Cisco and other major manufacturers), all aspects of high-frequency trading (including quotation, calculation, and order placement) can be completed in a very short time.

Co-location allows high-frequency traders to set the system close to the data center to reduce the physical distance of the optical fiber, which is to speed up the transmission speed. It is also one of the essential behaviors for high-frequency traders. Because the degree of competition in this industry has reached the level of microseconds or even nanoseconds, this physical distance can decide the victory or defeat between the competitors. It is the consensus in the industry for high-frequency traders to adopt co-location, but at the same time, the cost of renting a venue in the location is surprisingly high. Being able or not able to afford this cost has become an important threshold for high-frequency traders.

It can be seen from the above introduction that if you want to get started in the high-frequency trading industry, it is inevitable to invest a lot of money in hardware upgrading. As manufacturers of the hardware launch a new generation of faster hardware products each year, high frequency traders have no options but to upgrade the hardware accordingly each year. Not to mention the cost to raise a top IT and strategy team. In this market, the winners can make huge profits, but the losers may not even be able to pay for the investment of the infrastructure. That’s why many people are discouraged about stepping into the market. This also casts a veil of mystery on the industry itself.

Hypershark Technologies Corp. focuses on the research of hardware equipment in the high-frequency industry. Their main products are Hypershark high-frequency servers, provid you with HFT solutions and FPGA trading solutions.

The exclusive heat dissipation system and special treatments for Intel's latest generation of CPUs make Hypershark’s high-frequency server being ahead of other competitors. It provides you the overclocked server with the highest frequency in the world, which is an excellent choice for high-frequency traders when considering servers.