The World of HFTs
High frequency trading, colocation and tick-by-tick data feed, and what a retail trader is really up against on an exchange floor.
In the Hollywood movie “The Hummingbird Project”, two men try to lay a straight fibre-optic cable from the Kansas electronic exchange to the New York Stock Exchange, to cut transmission delay from 17ms to 16ms. A competitor installs microwave towers to cut the time further. In the end there is talk of getting it down to 9ms with neutrino messaging. You may not be sure that a millisecond of advantage matters. It does. Welcome to the world of high frequency trading (HFT), colocation and tick-by-tick data.
NSE started its colocation scheme in August 2009, letting brokers place their servers in the same physical location as the exchange. Colocation gives faster access to the price feed, the buy and sell quotes, and faster trade execution. Around three months after offering colocation, NSE also started a tick-by-tick data feed. Each trade causes a price tick, typically measured in nanoseconds these days, and a tick-by-tick feed carries every such tick along with the available bid and ask depth.
The privileged few who can afford it use colocation and tick-by-tick data to run HFT systems. HFTs are algorithms operating at high speed and high turnover. They fire large numbers of buy and sell orders rapidly, at a pace no human can match. There is nothing illegal about HFTs, or about the facilities that enable them: NSE does this with SEBI approval, and exchanges worldwide offer such facilities to those who can pay.
If you are a retail trader, know that price data reaches your broker platform a few hundred milliseconds later. Execution is delayed by about as much, before you even count the time taken to place the order by hand. On your platform you also see one-second snapshot data with five levels of market depth. That means OHLC values for the last second, which may not contain every tick, and only five levels of bid and ask quotes.
So if you are looking for arbitrage, scalping or order-book trading, remember that you are pitting yourself against powerful computers with institutional backing, sitting inside NSE premises, with far more insight and speed than you on the street can imagine. These strategies may not work for you.
