Is HFT Leveling the Playing Field?

Wall Street & Technology: Are we reaching the point of a level playing field when it comes to HFT? There are several IT solutions that claim to offer the same speeds. How can hedge funds and fast trading firms know they are getting the fastest speeds when trading?

Scott Sellers, Azul Systems: The playing field is ‘nearly’ level for HFT. As in any arms race, it’s a constant battle to stay ahead with diminishing marginal returns given how market structure has changed and will continue to evolve.

Cutting-edge solutions are a combination of proprietary software and some off-the-shelf hardware combined with software components. There are few absolute secrets in the financial sector – everybody knows everybody’s capabilities – and behavior in the market can be monitored. Markets must ask themselves how much they are able and willing to invest in technology and for what return.

WST: How are hedge funds reaching their fastest speeds possible these ways. We all hear about super fast networks but how do JVM fit into the big picture?

Sellers: The only way to reach the highest possible speed is to optimize every latency-inducing step. Fast networks are essential, as are high-performance NICs.

Many software components are built in Java, since it is the best language for developer productivity, and in most cases capable of meeting (or beating) the performance of a similar system written in C or C++. A predictable/deterministic JVM eliminates the variability and random jitter that challenges the performance of traditional JVMs.

WST: Are firms still pursuing top speeds as regulators and lawmakers consider a trading speed limit?

Sellers: Of course.

WST: What will a speed limit do to fast trading firms?

Sellers: There are many ways to compete. Raw speed is only one particular edge case; sustainability and predictability are equally important. The next logical step is higher-speed algo. A level playing field in terms of order entry and trade execution implies that a firm’s competitive advantage will be based on upstream pre-trade and real-time analytics (algo) – which is the basis for generating alpha over the long haul as technology arbitrage by definition cannot go on indefinitely. What is interesting is that though it is based in technology, limiting the speed will ultimately affect the business facet of a trading firm.

WST: Are firms using HFT for different asset classes besides equities and FX? Do you need this for commodities and bonds, for example?

Sellers: Today equities and FX are the primary users of HFT technologies. Other instruments will be added as and when it makes sense to do so. The pressures to innovate are endless in our industry.

WST: How does your solution help traders who want to take advantage of opportunities in emerging markets?

Sellers: Our software operates at a level just above the operating system, and as such is market structure agnostic, ie not application-specific. We team with a variety of trading systems vendors who adapt their platforms to multiple sectors, including emerging markets. By integrating their platform and components with our Java runtime, they can deploy a solution that can get to market quickly, without the need for time-consuming and expensive JVM tuning whenever the application (or market) changes.

WST: You mention getting to the ideal of a no risk race. Does such a thing exist? What would it entail?

Sellers: The ideal of a no risk race is based upon certainty of execution. This is is a goal that is achievable and in almost all cases. Of course, there are always edge cases where profits can be made -- and optimizations that can effectively target those scenarios. Our customers combine the best technologies available with the best people they can find -- and this combination is applied to areas where new opportunities reveal themselves.

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio