How to Set Up Your Own High-Frequency Trading Firm

  1. First come up with a trading plan: There are multiple strategies when it comes to high-frequency trading. A few of these include, but of course aren’t limited to, the following:
    • Liquidity rebate capture (getting money for providing liquidity on the exchange)
    • Latency arbitrage: Exploit delays in orders going through an exchange
    • Automatic market making: Using low-latency algorithms (really fast programs), you can buy out all available shares in a market in a fraction of a second and make a market/provide liquidity in a particular security.
    • Automatic index tracking (benchmarking): A basic algorithm will automatically correlate a position to an index, such as the S&P 500.
  2. Raise capital accordingly: Believe it or not, you don’t need millions of dollars to do high-frequency trading. Some clients start with only, say, $20,000 and work from there. Others have millions available and then the big players – the banks, hedge funds, and institutional investors – have hundreds of millions readily available at their disposal.
  3. Next, find a clearing house that will approve you as a counterparty: This is an integral part to your operation. Without a proper clearing party, which can be a small player up to someone like Barclays (pictured), your modus operandi isn’t going to work out properly. You need to be 100% sure your trades will be settled end-of-market-day.
  4. Determine who will be your prime broker: You should be familiar with the term prime broker, the investment bank or servicer who does all the stuff you don’t need to deal with. Settling trades, providing leverage, and lending securities are all an integral part of trading and of course, high-frequency trading. If you’re too small a player to go to the big dogs like Goldman Sachs, Fortis, and JP Morgan, there are “mini prime” brokers which are like a consortium of smaller players.
  5. Start up your back office and bookkeeping operations: Unless you want the SEC coming after you and FINRA sending you fines every week, you better have a sharp back office operation. Back office takes care of the administrative tasks associated with trading and makes sure all trades are settled. If your operation isn’t efficient, expect a lot of headaches as you try to clear up a discrepancy in a four million share block trade.
  6. Co-locate your servers near the exchanges via a data center: This is the big part here. Co-location – getting your servers as close to the exchange as possible. Your orders are dependent on the speed of light and the latency between two computers (the time it takes an order to go from Computer A to Computer B). There’s a huge difference between milliseconds (1/1000th of a second) and microseconds (1/1,000,000 of a second), so every little bit counts. You’ll need to pay a fee to place your server in the data center and will need to make sure it has the power to support your operation.
  7. Nail down with your trading strategy and implement it accordingly: Once your server is in the data center, it’s time to review:
    • Did you establish a clear-cut trading strategy, as discussed in the first slide?
    • Is your server working properly? Have you tested ping times and latency?
    • Have you established a fully-functional office complete with the aforementioned requirements (clearing, back office, etc.)?
    • If you’re using algos, do your algorithms work properly? You don’t want them going nuts.
    • Do you have adequate capital to begin your operation?
  8. Configure the algorithms: It is all about SPEED. Make sure you have them set up properly because if one little thing is wrong, you could lose all your money in a matter of seconds. Or perhaps your orders won’t execute properly. Whatever the reason, get your computer science/IT/nerd department on this and make them show you that you’re ready to roll.
  9. Ensure you have a front-end client with a decent interface so that you can access and configure your servers and trading strategies from afar: It’s impractical to go to the data center every time you want to do something or re-configure your server. A decent front-end client for making changes is essential to sticking to your plan. Some services come with a GUI (graphical user interface) you can use but others may require more intricate knowledge of things like UNIX.
  10. Test your setup and make sure everything is functioning properly – both on your end and any third-party software/hardware vendor’s end: You’ve set up the business, installed the servers, configured the algos, paid the staff, eaten lunch – time for one final check before lift off. After all, you need to make sure your strategy will work properly once you “turn the machines on.”

Enter the markets and start trading!: Turn it all on and kick back. Let the traders or the algos do the work for you and congratulate yourself on a job well done. You’ve finally started your own high-frequency trading shop.

Ariel Silahian
Skype: silahian


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