T7 Wealth Creators

The World of HFTs

In the Hollywood movie “The Hummingbird Project” two guys try to dig and lay a straight fibreoptic cable from Kansas electronic exchange to the New York Stock Exchange with an aim to cut the transmission delay from 17ms to 16ms. A competitor tries to install microwave towers to cut the time further down. In the end there is talk about cutting down the time to 9ms with neutrino messaging. Now you may not know whether the ms advantage matters. But it does. Welcome to the world of high frequency trading (HFT), colocation and tick by tick data. 

NSE started the colocation scheme in August, 2009. It allowed brokers to place their servers on the same exchange physcial location. The benefit of colocation is that it allows faster access to the price feed (buy/sell quotes) and faster trade execution. Around three months after offering colocation, NSE also starts the Tick by Tick datafeed. Each trade cause a price tick which is typically in nano seconds these days. A tick by tick datafeed has information of all such price ticks along with the available bid / ask information depth. The privileged few who have enough money can take benefit of this colocation and tick by tick data to run High frequency Trading (HFT) systems . HFTs are algos operating at high speeds and high turnover rates. They shoot large number of buy and sell orders rapidly at a speed that cannot be matched by a human being. There is nothing illegal about HFTs or the enabling facilities. NSE does so with SEBI approval and exchanges world over offer such facilities to those who can afford it. 

If you are a retail guy, know that the price data comes few hundred ms later on your broker platform. The trade execution is also delayed by that much excluding the time taken to punch in the orders manually.  Also on your broker platform you see a 1 sec snapshot data along with 5 level market depth. It means it has the OHLC values of last 1 sec which may not have all the ticks and it has just 5 levels of bid / ask quotes. So if you are looking for arbitrage trades, scalping or order book trading remember you are pitting yourself against powerful computers with instituional backing at NSE premises that have way more insight and speed than you on the street can even imagine. These strategies therefore may not work for you.