Birth of High Frequency Trading: Equity Markets Go Electronic

Electronic trading defines modern day trading in global equities markets. Electronic trading occurred on the NASDAQ market first as market makers leveraged electronic communication tools to provide liquidity into the market. After a decade of numerous regulatory changes, technology and business innovations, the electronification of the U.S. equities market had been completed. This set the foundation for the high frequency trading (HFT) firms. The ultimate impact of high frequency proprietary trading firms can be felt in many different areas of the institutional trading market. What appears to be a never-ending pursuit of low-latency is certainly one of the better documented by-products of firms engaging in high frequency trading activities. Today's dominance of high frequency proprietary trading firms is just a by-product of all of the changes that the market has experienced over the last decade. These firms are the new market makers of the present and future unless other competitive forces come into play to alter the current market arrangement. This chapter describes how High Frequency Trading came into being; it explains the fundamentals of HFT, the electronification of the U.S. equities market and the impact of HFT on the trading market.