Expansion in High Frequency Trading

High frequency trading (HFT) in the futures markets is not a new development. Once the markets started to go electronic — in the mid-1990s in Europe and in the early 2000s in the United States — market participants quickly realized that they would need to translate their trading style from a pit environment to an electronic platform style in order to stay competitive. Pit trading was all about watching the trading flow and how much size was on the bid and to offer when the price point changed, and electronic trading is no different. Live market data needs to be consumed at a rapid pace to predict future price movements, and the ensuing trade decision needs to be made as quickly as possible. Other types of traders use similar ways of accessing the markets, but their time horizons can last longer. As such, the high speed trading market has two silos: a liquidity provision model, and a model-based, customer-driven order flow. This chapter traces the expansion of high frequency trading and describes its impact in the marketplace. High frequency trading is no longer an U.S. equities market phenomenon. In addition to expansion into several asset classes, high frequency trading firms have aggressively branched into other markets like European market, Asian market and Brazilian market.