The Speed Traders: An Insider's Look at the New High-Frequency Trading Phenomenon That is Transforming the Investing World

The Speed Traders: An Insider's Look at the New High-Frequency Trading Phenomenon That is Transforming the Investing World

by Edgar Perez
The Speed Traders: An Insider's Look at the New High-Frequency Trading Phenomenon That is Transforming the Investing World

The Speed Traders: An Insider's Look at the New High-Frequency Trading Phenomenon That is Transforming the Investing World

by Edgar Perez

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Overview

The secrets of high-frequency trading revealed!

“Edgar’s book is fantastic . . . I recommend it highly.”
—Bart Chilton, Commissioner, United States Commodity Futures Trading Commission (CFTC)

“I have interviewed the most successful high-frequency traders in New York and Chicago, but I have learned so much more by reading Perez’s book. He covers the most relevant topics we need to know today and tomorrow.”
—Mark Abeshouse, Chairman, Augustus Capital

“Alternating between an annotated timeline of the development of high-frequency trading and interviews with top high-frequency traders, Perez illuminates the world of speed. All in all, an enlightening book.”
—Brenda Jubin, contributor to Seeking Alpha

“This is a comprehensive and compelling summary of the trading industry in general, as well as high-frequency trading. If you are interested in this field or of knowing a critical component of all future markets—read this book.”
—Paul Dowding, Managing Director, Meridian Equity Partners

“Very timely, covers the 2010 Flash Crash and the current high-frequency trading environment.”
—Patrick Sweeney, Vice President, JP Morgan Chase

“There is a new day in trading and speed is the key. Edgar Perez is the poster child.”
—Eugene Steele, Managing Partner, Trading Rooms World Wide

About the Book:

High-frequency traders have been called many things—from masters of the universe and market pioneers to exploiters, computer geeks, and even predators. Everyone in the business of investing has an opinion of speed traders, but how many really understand how they operate? The shadow people of the investing world, today’s high-frequency traders have decidedly kept a low profile—until now.

In The Speed Traders, Edgar Perez, founder of the prestigious business networking community Golden Networking, opens the door to the secretive world of high-frequency trading (HFT). Inside, prominent figures of HFT drop their guard and speak with unprecedented candidness about their trade.

Perez begins with an overview of computerized trading, which formally began on February 8, 1971, when NASDAQ launched the world’s first electronic market with 2,500 over-the-counter stocks and which has evolved into the present-day practice of making multiple trades in a matter of microseconds. He then picks the brains of today’s top players. Manoj Narang (Tradeworx), Peter van Kleef (Lakeview Arbitrage), and Aaron Lebovitz (Infinium Capital Management) are just a few of the luminaries who decided to break their silence and speak openly to Perez. Virtually all of the expertise available from the world of speed trading is packed into these pages.

You’ll get insight from HFT’s most influential trailblazers on the important issues, including:

  • The basics of launching an HFT platform
  • The important role speed traders play in providing market liquidity
  • The real story behind the “flash crash” of May 2010
  • Emerging global HFT markets
  • M&A and consolidation among the world’s biggest exchanges

The Speed Traders is the most comprehensive, revealing work available on the most important development in trading in generations. High-frequency trading will no doubt play an ever larger role as computer technology advances and the global exchanges embrace fast electronic access.

Essential reading for regulators and investors alike, The Speed Traders explains everything there is to know about how today’s high-frequency traders make millions—one cent at a time.


Product Details

ISBN-13: 9780071768306
Publisher: McGraw Hill LLC
Publication date: 05/06/2011
Sold by: Barnes & Noble
Format: eBook
Pages: 256
File size: 2 MB

About the Author

Edgar Perez is a former McKinsey & Company consultant; founder of Golden Networking, the premier networking community for business executives, entrepreneurs, and investors; and host of High-Frequency Trading Happy Hour business receptions in New York City, Chicago, Hong Kong, Singapore, and London.

Perez has been featured on CNBC Cash Flow, BNN Business Day, TheStreet.com, Channel NewsAsia Cent & Sensibilities, and in The Wall Street Journal, The New York Times, The Dallas Morning News, Los Angeles Times, iMoney Hong Kong, Hedge Fund Brief, Oriental Daily News Hong Kong, and other publications. He has spoken at Harvard Business School’s 17th Annual Venture Capital & Private Equity Conference, High-Frequency Trading Leaders Forum 2011, CFA Singapore, Hong Kong Securities Institute, Courant Institute of Mathematical Sciences at New York University, Global Growth Markets Forum, and other events.

Read an Excerpt

THE SPEED TRADERS

AN INSIDER'S LOOK AT THE NEW HIGH-FREQUENCY PHENOMENON THAT IS TRANSFORMING THE INVESTING WORLD


By Edgar Perez

The McGraw-Hill Companies, Inc.

Copyright © 2011The McGraw-Hill Companies, Inc.
All rights reserved.
ISBN: 978-0-07-176830-6


Excerpt

CHAPTER 1

The Emergence of High-Frequency Trading


While high-frequency trading has gained relevance with the general public only recently, the practice of using computerized trading has been active for decades, going as far back as 1971, when Nasdaq started as the world's first electronic market.


In the Beginning, 1969–1976

Traditionally, financial markets were physical locations where brokers with buying and selling orders met and matched them appropriately. The technological evolution and, consequentially, the exponential growth of computing power brought a revolution to the financial markets, making it unnecessary for brokers to meet physically and enabling traders from remote locations to participate. The now Nomura-owned Instinet led the charge more than three decades ago.


February 24, 1969

On this day, Institutional Networks Corp. filed a patent application for its "Instinet Communication System for Effectuating the Sale or Exchange of Fungible Properties Between Subscribers." The company, founded two years before, aimed to compete with the New York Stock Exchange by means of computer links between banks, mutual funds, and insurance companies, with no delays or intervening specialists. Through this Instinet system, which would start operating by 1970, the company would provide computer services and a communications network for the automated buying and selling of equity securities on an anonymous, confidential basis. It also acted as a securities information processor, supplying professional-level market data systems containing last sale, quote, and size information. Institutional Networks received income from commissions on the trades and from the rental of the Instinet terminals located in the offices of its clients. Institutional Networks was renamed Instinet in 1985.


February 8, 1971

This was the first trading day at the Nasdaq, an electronic alternative to over- the-counter stock exchanges. Nasdaq opened electronically with 2,500 over-the-counter stocks. It was not until the 1990s that the Nasdaq became a competitor of the New York Stock Exchange (NYSE); Nasdaq merged with the American Stock Exchange (AMEX) in 1998.


May 1, 1975

On this date, the Securities and Exchange Commission (SEC) banned fixed minimum commission rates, a cornerstone of the U.S. securities markets and all other organized exchanges throughout the world. "Until then, the NYSE fixed the minimum commission of stock trading; these extraordinary high costs had hindered quantitative traders from entering the equity markets," according to author Lars Kestner.


March 1, 1976

The fully automated Designated Order Turnaround (DOT) system was introduced on this day by the NYSE to route smaller orders electronically. The orders attended by a stock exchange agency would be sent electronically to the computers inside the market, allowing the stock exchange agencies to confirm the execution of some operations while still having the client on the telephone line, significant progress for the time.

The DOT system involved the use of computer technology to relay orders. With a network interface, it was possible for investors to submit orders that were immediately logged in the servers for the exchange. The orders could be executed and confirmation of the execution relayed to the investor in what was then considered real time. This type of real-time investment capability made it possible for investors to benefit by having an order executed immediately rather than 10 minutes or an hour later. The DOT system was able to handle such transactions as limit orders, basket trades, and several other types of market orders.


The Lead-up to Black Monday, 1982–1987

There were many voices eventually blaming the market collapse on electronic trading. The "flash crash" of 2010? No, Black Monday in 1987. That's right—even back then, startups and banks, which were just getting started in the electronic trading race, were pointed as the culprits of the dramatic decline in the financial markets. The story would repeat itself 23 years later.


July 5, 1984

On this date, the NYSE approved the use of a version of the Super-DOT system for options trading. Super-DOT was an improvement over the DOT system and guaranteed that any market order of less than 2,100 shares of a stock would be executed within three minutes at the prevailing bid price (for a market sell order) or asked price (for a market buy order) at the time the order was entered or at better prices, if possible. The DOT-for-Options system provided the NYSE options floor with an electronic order-routing system not available on any other options exchange. The Super-DOT system, which included the NYSE's DOT, Opening Automated Report Service (OARS), and Limit Order (LMT), had been used to provide automated trading support to the NYSE equities trading floor since 1976.


October 19, 1987

After five days of intensifying stock market declines, selling pressure hit a peak on this day, Black Monday. The Dow Jones Industrial Average (DJIA) fell a record 22 percent, with many stocks halted during the day because order imbalances prevented true price discovery. The lead-up to October 1987 had seen the DJIA more than triple in five years, and price/earnings (P/E) multiples on stocks had reached above 20, implying very bullish sentiment. And while the crash began as a U.S. phenomenon, it quickly affected stock markets around the globe; 19 of the 20 largest markets in the world saw stock market declines of 20 percent or more.

Floor traders, working by telephone, dominated the action, and computer-generated trading still was in its infancy; certainly, dark pools and high-frequency trading were the stuff of science fiction, said the Wall Street Journal. Nevertheless, that didn't stop people from speculating on the exact causes of the crash (which was rare in that the market made up most of its losses rather quickly rather than falling into a protracted economic recession) and pointing to automatic trading programs in place at the time as possible culprit. An important parallel, though, was how a number of traders abandoned the market; in 1987, some human market makers on the floor of the exchange stopped providing bids for certain stocks; more than two decades later, in a market dominated by technology, high-speed traders, who often provide liquidity for the market, just switched off their computers for very important reasons that will be detailed in Chapter 9.


Technology Improves, 1994–2001

Upstarts and established players jockeyed for positions at the end of the 1990s to advance their standing as the SEC readied itself to approve Regulation ATS, the regulation of alternative trading systems, an area now dominated by BATS (Better Alternative Trading System) and Direct Edge.


August 1, 1994

On this date, Banque Nationale de Paris (BNP) announced that it would purchase most of the operations of Cooper Neff, a Philadelphia-based options trading firm with a reported $400 million in capital, to provide a broader array of financial products to its corporate and institutional clients worldwide. The acquisition would include all of Cooper Neff's technology and research capabilities, as well as most of its trading operations.

Richard Cooper, founding partner of Cooper Neff, expected the buyout would push his firm "into the direct OTC [over-the-counter] customer market" using BNP's clients in Europe and Asia. Before, Cooper Neff's 100-plus traders made markets in exchange-traded options
(Continues...)


Excerpted from THE SPEED TRADERS by Edgar Perez. Copyright © 2011 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Table of Contents

Chapter 1. Manoj Narang (Tradeworxs); Chapter 2. Stuart Theakston (GLC Ltd.); Chapter 3. Mark Holt (BlueCrest Capital); Chapter 4. Aaron Lebovitz (Infinium Capital Management); Chapter 5. Richard Flom, Systematic Alpha Management's Head Trader; Chapter 6. Aaron Lebovitz, Infinium Capital Management's Managing Director; Chapter 7. Peter Van Kleef, Lakeview Arbitrage's CEO; Chapter 8. Francois Magny (Starmark Proprietary Trading Ltd.)
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