Emotions and human error can result in substantial losses when trading, especially options trading. Algorithmic trading relies heavily on technical analysis and statistical data. It provides structure to trades and can even execute the trades for you.
The average investor may not know how to write the best algorithm to return profits. Here is our recommended list of the top high frequency algorithmic trading firms that are all-stars in their field.
What Is High-Frequency Algorithmic Trading?
High-frequency trading or HFT utilizes a sophisticated mathematical algorithm to make trades. It eliminates the human component and removes emotion from trading decisions. The algorithm on a powerful computer analyzes the market, finds emerging trends, and then automatically places a large order at incredible speeds. The algorithm only holds the position for a short period of time.
This automated trading platform is typically used by hedge funds, large investment banks, and institutional investors. Individual investors may write an algorithm to filter through potential trades to save time. By fulfilling a set of criteria, you may then authorize the program to place a trade. In theory, since HFT can find and place trades faster than a human trader, it can generate more profits in a shorter amount of time.
History of High-Frequency Trading
In 1998, the Securities and Exchange Commission (SEC) authorized electronic exchanges, which led to automated high-frequency trading. HFT was able to execute trades 1,000 times faster than a regular person.
In 2000, HFT accounted for less than 10 percent of total equity trading. However, by 2001, high frequency trades only took several seconds to execute. By 2010, the time shrunk to milliseconds. Two years later, a computer could place a trade in nanoseconds.
In 2005, HFT accounted for 35 percent of total equity trades in the United States. Between 2005 and 2009, the HFT volume on the New York Stock Exchange grew by 164 percent. During the 2010 Flash Crash, HFT accounted for 56 percent of trading. HFT firms significantly contributed to the $1 trillion loss in the market as the DOW plunged 1,000 points.
Major innovations in technology helped HFT execute trades even faster. In 2011, Nano trading technology allowed trades to be executed in just a few nanoseconds, or a few billionths of a second. Social media news became actionable trading signals in 2012. Algorithms were able to read these social media messages and execute trades, which supported the further popularity of HFT.
How Does High-Frequency Trading Work?
High-frequency trading uses powerful computers that have specialty software with carefully written algorithms. This software program searches the markets for a trade that fulfills certain conditions. Once the setup is identified, the program executes the trade in nanoseconds. In fact, a custom-made chip worth millions was developed in 2012 to shave 0.006 second off a trade transaction time. This allows HFT to place trades in 0.000000074 second.
Of course, there are inherent risks of high-frequency trading. It happens so fast that if there is a glitch in the software, the financial repercussions may be devasting. This occurred in 2012 when Knight Capital Group’s new trading program had an error and ultimately cost the company $460 million in 45 minutes before it could be stopped. Subsequently, the SEC will launch investigations and hold firms and traders responsible if your algorithm violates trading rules, such as failing to establish sufficient safeguards or attempting to manipulate the market.
Hedge Fund vs. Proprietary Trading Firms
Hedge funds and proprietary trading firms both use high-frequency trading. Hedge funds attempt to earn a return on investments for high-net-worth individuals and financial institutions. On the other hand, proprietary trading typically involves banks or other financial firms directly trading for their own profit. For example, some financial institutions may have a proprietary trading desk that hires proprietary day traders to trade on the company’s behalf and potentially receive a portion of the profits that they generate. At times, a hedge fund could have a proprietary trading desk.
This distinction is significant for individual investors to know their options when searching for high frequency trading firms.
Top 8 High-Frequency Trading Firms
Two Sigma Investments
Two Sigma Investments is a New York City-based global hedge fund founded in 2001. In May 2019, the fund had $60 billion in assets under management. It’s known for its use of a variety of technological methods, such as machine learning, distributed computing, and artificial intelligence as part of its trading strategies.
Like all quantitative hedge funds, Two Sigma must protect its proprietary mathematical trading models. Two Sigma states that they: “are the lifeblood of its business.”
Virtu Financial is a high-frequency trading firm and one of the largest high-frequency market makers in the world. They were rated the number one electronic trading client service in the All-America Trading Team Rankings by the Institutional Investor in 2018. They were also ranked the number one Leader in Portfolio Trading Relationships by Greenwich Associates in Canada for 2018.
Virtu Financial advocates for transparent and flexible solutions. Therefore, you can observe their algorithms in action and track the progress of your orders. Also, Virtu Financial recently made some high-profile acquisitions of KCG Holdings, a rival market making firm, and Investment Technology Group, an agency brokerage and financial market technology firm.
In 2018, Virtu Financial had $7.38 billion in total assets, with a net income of $620.2 million.
Citadel Securities is the market making arm of Citadel LLC founded in 2002. In 2015, they were the largest market-maker in options in the United States. They were ranked number 1 for providing price improvement for investors in both S&P 500 and non-S&P shares by Barron’s.
Their high-frequency trading automation offers more reliable trading at lower costs with tighter spreads. On average, they can provide traders quotes in 0.35 seconds.
DRW is a leading trading company founded in 1992. They are technology-driven and trade their own capital in financial markets around the world. This firm was one of the first established high-frequency trading firms to expand into crypto trading in 2014 through one of its affiliated companies.
Although few trading firms make their finances public, a subsidiary of DRW made nearly $1 billion in revenue in two years, and DRW Investments LLC reported $454.8 million in 2016.
GTS is a global proprietary quantitative trading firm founded in 2006. It is the largest New York Stock Exchange designated market maker responsible for trading in more than 900 public companies.
It recently completed its acquisition of the automated Exchange Traded Funds (ETF) and Wholesale OTC Market Making businesses. This transaction is another step to provide capital market business access to its premier trading technology.
RSJ Securities is a fully licensed securities trader that focuses on algorithmic trading. Their primary market strategy is market making, which increases market liquidity. They use mathematical models and algorithms to trade in futures contracts and global derivative exchanges in the United States, Germany, and Great Britain.
Hudson River Trading
Hudson River Trader’s (HRT) headquarters are in New York City but has locations all over the world. It was founded in 2002 and is a quantitative trading firm responsible for about 5 percent of the United States stock market volume. The firm claims that: “HRT is first and foremost a math and technology company.” They bring a mathematic and scientific approach to trading with researchers at the forefront of algorithmic trading.
HRT claims to stand out from other high-frequency firms for several reasons. They hold approximately 25 percent of their trading capital overnight, which is rare for high-frequency trading. HRT’s average hold time is about five minutes, where some high-frequency firms only hold assets for less than a second. Finally, they do less than one percent of trading in dark pools, networks of privately held trading forums outside the purview of the general investing public.
Tower Research Capital
Tower Research Capital is a quantitative trading firm that employs algorithmic strategies and a sophisticated fast trading infrastructure. The financial services fund was founded in 1998. In Tower Research Capital latest SEC filings, they reported an estimated portfolio value of $1.6 billion.
Tower Research relies heavily on strategists and engineers. Strategists develop algorithmic trading strategies using statistics and predictive modeling while engineers build and maintain its trading platform and infrastructure.
Technology, engineering, and mathematics have changed the stock market. With more and more firms utilizing high-frequency trading, the individual investor will likely need to adapt their day trader strategies as well.
Moreover, it is also possible to get a job at a high-frequency trading firm. You’ll likely need to work closely with software engineers and quantitative researchers to design and troubleshoot high-frequency trading strategies and systems. Trading experience is also probably required before any of these top eight high-frequency trading firms will start the hiring process.
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