What does the map with blue and red dots show?

MIT researchers worked out the physical locations to minimize network latency between a trading system (the small blue dots) and principal exchanges (the big red dots).  The graphic is also a good visualization of the extent and integration of global financial markets.

Wissner-Gross and Freer,”Relativistic Statistical Arbitrage,” Physical Review E 82, 056104, 2010.  Figure 2.

 

What is High Frequency Trading?

Here’s a definition recently discussed by the CFTC. High Frequency Trading (HFT) is a form of automated trading  that employs:

a) algorithms for decision-making, order initiation, generation,  routing or execution;

b) low latency technology that is designed to minimize response  times, including proximity or co-location services;

c) high speed connections to markets or order entry;

d) recurring high message rates (orders, quotes or  cancellations), using one or more forms of objective measurement,  including cancel-to-fill ratios, participant-to-market message  ratios, participant-to-market trade volume ratios.

What is Automated Trading?

The definition of automated trading (AT) is much discussed.  For the purposes of AT 9000, the defining characteristic of an AT system is neither the duration of its trades nor the volume of its order requests routed to the exchange, but rather the risks a given system poses to the marketplace. Any automated or algorithmic trading system that enters computer-generated order requests into the market gives rise to immediate risks in the event of its strategic or technological failure.  Such systems, broadly defined, may engage in market making, index arbitrage, statistical arbitrage, or any number of other strategies that provide liquidity by way of automated decision-making. This definition also intends to include automated systems that take liquidity as well.