Report gives detailed Study on what HFT is and how it lead to crash in US. Impact of HFT, How HFT works.

2. 1. Abstract
2. History of High Frequency Trading
3. All about High Frequency Trading
4. Impact of High Frequency Trading
5. Trade using price action in HFT
6. Flash Crash: May 2010
7. Pros & Cons of HFT
8. Future of High Frequency Trading
9. Extras
10. Conclusions
11. Bibliography
CONTENTS

3. Abstract :
So, here’s a report unlocking all the mysteries pertaining to high frequency trading
& black box. It elegantly summarizes all aspects of HFT in a well-defined
sequential order. A whole lot of research and background working has been
inculcated to put in a script that reflects on every minor, every major premise
before defining HFT altogether.
This report begins with the basic introduction and fundamentals related to it
followed by the historical record of the past and how it has been affecting trading
world since then. To exemplify, a case study has also been presented about the
Flash crash of US that shook the world in 2010 and awed the analysts beyond
their understanding of the markets as they know it. To interest the common
reader, eliminating the Jargons, a typical-common-investor-TIM’s story across the
pages awaits. The report further deliberates on merits & demerits associated with
the enigma of HFT. Finally, after through research and understanding we
conclude by myth-busting and summarizing all theories of HFT.
So, we present to you a black box – finally lit with behind the scenes of HFT
trading.
1
TIM'S TALE :
Meet TIM AND JIM
Hello Investment Enthusiasts!! I am TIM.
I lead a lovely life, work diligently, pay taxes and save my hard earned money. And as any prudent
man I invest too. For which I solely depend on JIM, my financial doctor. He recently acquainted me
with a whole new trading strategy, HFT i.e. High Frequency Trading. What a wondrous
technology!! Basically mega computers with very science-y algorithms and built in trading
psychology run the trading operations of some big players in the market at lightening speeds!! I
would love to learn more about this from JIM...

4. 2
In 1960, an
average share was
held for four years. In 2000,
the holding time fell to 8 months
and to 2 months in 2008.
In 2014, the average
share was held for
20 seconds
HFT reduced
the duration of
arbitrage opportunities
from 97 milliseconds in
2005
to 7 milliseconds
in 2011
In HFT each millisecond
is worth $100 million
in revenue per year
A
HFT Firm
processes orders in less than
400 microseconds, faster
than a blink of
an eye
In 2013, HFt
accounted for 6.7
trillion euros of equity
trading volume which is
39% of the total
volume.

5. 2010
2010
2000
1983
1602
1998
2005
World First stock exchange launched
by Amsterdam Stock Exchange, Dutch
East India Company traded in printed
Stocks & company
First Computerized System to provide
real-time market data, financial
calculation & analytics to Wall Street
firms launched by Bloomberg
U.S SEC (Security and Exchange
Commission) authorized electronic
exchanges, paving the way for
computerized high Frequency Trading
(HFT) services that can execute trades
1000 times faster than human
HFT accounted for fewer than 10%
equity orders
35% Equity trades in U.S were HFT
HFT makes up 56% of equity trades in
U.S. And from seconds HFT reported to
trade in macro seconds
Flash Crash!!! On May 6th
2010, 2.45
p.m., United States trillion-dollar stock
market crash happened. Dow jones
plummeted 1000 points within single
day. 600 points dropped within 5 min.
HFT was held responsible for this.
HISTORY OF HIGH FREQUENCY TRADING
E3

6. 2015
2013
2012
2011
2012
2014
Nano trading technology was launched
by a firm Fixnetix, developed a
microchip that can execute trades in
nanoseconds- equal to one billionth of
second
1 nano sec= 0.000000001 seconds
HFT is responsible for 70% of all US
equity trades was estimated.
$300 million transatlantic cable is
being built just to shave 0.006 sec off
transaction times between New york
and London.
Italy becomes first country to launch
levy on HFT, charging a levy of 0.002%
on equity transactions lasting less
than 0.5 seconds.
High-frequency trading firm Citadel
LLC was fined $800,000 for violations
that included quote stuffing by U.S Gov.
On 18th Aug., Dow Jones Industrial
Average fell 33 points and gathered
downward momentum. August 24 as
the Dow opened 1,000 points down.
Stock market sell-off took place. One
of the reasons of market crash was
lack of liquidity due to HFT.
4

7. 5
All About HFT :
High-frequency trading (HFT) is a sort of algorithm program trading platform which takes the
help of high speed and powerful computers to do transactions of huge number of orders at
really high speeds. High-frequency trading exercises complicated algorithms to examine
numerous markets as well as carry out orders on the basis of market conditions. On average,
the traders who have the fastest performance speed will be much more profitable than others
who have slower performance speed. It was estimated since 2009; that HFT almost accounts to
60-75% of all the US equity trading volume. This number fell off to approximately 50% in the
year 2012. Usually, High-frequency traders step in and out of their short-term ranks at extreme
volumes as well as extraordinary speeds just to aim to seize a small percentage of profit on each
and every trade. Customarily, HFT firms do not feed on considerable amounts of capitals, pile
up positions otherwise possess their portfolios at once. Due to this, the HFT has its possible
Sharpe ratio ten times greater than the outdated buy-and-hold strategies. Mostly, the HFT
traders battle amongst each other more willingly than the long-term investors. The HFT firms
put together the low margins along with exceptionally huge volumes of trades and that
commonly numbers in the millions.
What is HFT?
Some firmsallow algorithmprograms to learnand create their own rules. However, the firmsare unaware of the rules the programscreate

8. 6
A significant body of research claims that HFT and other
electronic trading devices present some new forms of
disputes in the financial approaches. Both, algorithmic as
well as high-frequency traders were held off to have
donated to the instability in the Flash Crash as on May 6,
2010. This happened when the high-frequency liquidity
workers quickly pull out from the market. Many European
countries have projected of restraining or else forbidding
HFT because of fears about instability.
HFT includes:
• Algorithms for decision
making, order initiation,
generation, routing, or
execution, for each individual
transaction without human
direction;
• Low-latency technology that
is designed to minimize
response times, including
proximity and co-location
services;
• High-speed connections to
markets for order entry; and
• Recurring high-message rates
(orders, quotes, or
cancellations) determined using
one or more objective forms of
measurement, including cancel-
to-fill ratios; participant-to-
market message ratios; or
participant-to-market trade
volume ratios.
Other characteristics often attributed to proprietary firms
engaged in HFT are:
(1) The use of extraordinarily high-speed and sophisticated
computer programs for generating, routing, and executing
orders;
(2) Use of collocation services and individual data feeds
offered by exchanges and others to minimize network and
other types of latencies;
(3) Very short time-frames for establishing and liquidating
positions;
HFT is conducted through supercomputers that give firms the
capability to execute trades within microseconds or milliseconds
(or, in the technical jargon, with “extremely low latency.”) In
practice, depending on the particulars of the trade, trading
opportunities can last from milliseconds to a few hours.
Generally, the traders who employ HFT strategies are
attempting to earn small amounts of profit per trade. Some
arbitrage strategies can reportedly earn profits close to 100% of
the time, but many HFT strategies are based on the law of
averages. Reports indicate that such strategies might make
money on only 51% of the trades, but since the trades are
conducted hundreds or thousands of times per day, the
strategies may still be profitable.
What are the Trader Strategies used in HFT?

9. 7
arket making: which involves a firm providing liquidity by matching buyer and seller orders
or by buying and selling through their own securities inventories if a market maker cannot
immediately match buyers and sellers. Market makers earn a profit on the difference
between the bid prices buyers are willing to pay for a security and the ask prices sellers are
willing to accept
Arbitrage trading: which involves profiting from price differentials for the same stocks that
are traded on different market centres such as the London Stock Exchange and the New
York Stock Exchange or the same stock and its derivatives, such as stock options. Within this
context various HFT firms employ something called slow market arbitrage wherein the firms
attempt to arbitrage minute price differences for stocks between various exchanges resulting
from infinitesimal time differences in the trading prices that they report on the same securities
Pair arbitrage trading: which involves exploiting relative price discrepancies between closely
related companies (like Home Depot and Lowes for example).
Momentum ignition strategies: which involve a proprietary trading firm initiating a series of
orders or trades aimed at causing rapid up or down securities price movements. By
establishing an early position, the proprietary trading firm is attempting to profit when it
subsequently liquidates the position if it has succeeded at sparking the aforementioned price
movements.
Liquidity detection trading: which involves the use of computer algorithms to identify large
institutional orders that sit in dark pools or other stock order trading venues. HFT traders
may repeatedly submit small-sized exploratory trading orders intended to detect orders from
large institutional investors. The process can provide the HFT trader with valuable
intelligence on the existence of hidden large investor liquidity, which may enable the trader to
trade ahead of the large order under the assumption that the large order will ultimately
move the market’s pricing of the security to the benefit of the HFT firm.
Ticker tape trading: A different way in which the HFT works is by gathering set in market
data, for instance, stock prices in addition to the number of shares traded. This is known as
Ticker tape trading. By witnessing a flow of quotes, high-frequency trading equipment are
competent of taking out information which has not up till now crossed the news. Later, they
use this information to assign orders at a quick speed.
HFT Strategies Include:
Profits from HFT in American Stocks were at least $1.25 billion in 2012, down
35% from 2011 and 74% lower than the peak of $4.9 billion in 2009.

10. 8
Controversies:
Many see high frequency trading as unethical and an unfair advantage for large
firms against smaller institutions and investors. The logic behind the fears is this:
algorithms and software do not muse about global economic events; they merely
chase mechanical patterns that they are programmed to find, such as movements in
trend or momentum. They do not make decisions based on real-world eventualities.
Computers hold substantial sway and can execute a barrage of trades that create
unprecedented volatility at a rate that human reactions simply cannot match. More
about it in the upcoming sections.
Black Box Trading - What and How :
Investors, from high-net-worth individuals to
pension funds, remain intrigued in
quantitative trading-mainly due to the
impressive returns that can be generated by
practitioners. Yet, few actually understand
what goes on inside these black box trading
strategies.
Also called ‘Quant Trading’, it is a significant,
but mysterious, part of the capital markets.
Black box strategies are developed and
managed by some of the greatest minds in
the world. Yet, these black boxes are reviled
as often as they are praised, and more often
still, they are dismissed as incomprehensible.

11. Impact of High Frequency Trading
Critics of HFT have raised several concerns about its impact on the market and the economies
of the participating nations. One criticism relates to its generation of so-called phantom
liquidity, in which market liquidity that appears to be provided by HFT may be fleeting and
transient due to the posting of and then the almost immediate cancellation of trading orders.
A related concern is whether HFT could exacerbate market volatility. These concerns have
percolated since the “Flash Crash” of May 6, 2010. Another area of criticism is that HFT often
involves two-tiered markets, in which HFT firms pay extra for the right to access data feeds,
or to collocate their servers within exchanges’ servers—all of which is designed to give some
traders an advantage over others. HFT’s supporters argue that the increased trading provided
by HFT adds market liquidity and reduces market volatility. They argue that HFT is a
technological innovation that is the latest evolutionary stage in a long history of securities
market making. They assert that HFT has reduced the bid-ask spreads in stock trading,
thereby lowering trading costs.
As regulatory response, Securities and Exchange Commission, in America, adopted a number
of regulatory and programmatic initiatives intended to help fulfil the agency’s statutory
mandate to provide for investor protection and to maintain fair, orderly, and efficient markets.
These includes MIDAS, The Consolidated Audit trail, Regulation SCI and New Circuit
breakers. This was all in response to concerns over aggressive, destabilising trading strategies
in vulnerable market conditions
9
In 2009,
HFT Traders moved3.25 billion shares a
day.
In 2012, it was
1.6 billion
a day.

12. 10
S&R Lines:
Support and Resistance lines forms the basis for trading while tracking the price action,
owing to the fact that S&R lines can access the crucial points of the market fluctuation and
they often witness reversal. Therefore, these lines are often used to read charts and to
analyze the price pattern, the market is undergoing. Reading charts and trading with Price
Action will always be around as long as Traders have access to charts!
How exactly is it done:
High frequency Traders profit by trading extremely small and quick moves. These moves
tend to be highly erratic and fast but only normally equate to no more than 10 pips. If
Traders are trading small time frames such as 5 and 10 minute they are likely to be
whipsawed out due to being on the wrong side of these quick moves. Trading longer time
frames preferably on the daily chart and above allows Traders to block out all the market
noise. Whilst Traders on the small time frame charts are being knocked out, the Traders on
the longer timeframes don’t even notice the moves high frequency trading creates.
Since, it is quite obvious that S&R Lines are defined for a particular time frame and hence
choosing adequate time frame is a necessity to get high profit and low risk potential.
Choosing a larger time frame gives more time to take decision to make a trade wherein you
tend to make an effective move whereas shorter the time frame more are the chances of
making an irrelevant trade.
Three stages of market:
1. Trending stage: It refers to the position of a market where the price pattern goes in a
certain direction i.e. it is either uptrend or a downtrend.
2. Transition stage: It is a stage of market where price reversal is observed and is generally
located near the S&R line. It marks the change in price trend in market i.e. uptrend to
downtrend and vice-versa.
3. Ranging Stage: As the name suggests, it is portion of chart where you cannot guess, in
which particular direction is market moving. Price trend keeps on ranging and doesn’t follow
a particular pattern.
Trade using price action in HFT

13. No
Yes
Switch time frames
Market
Check patterns to get low risk entry
Risk Reward
Ratio > 1:2
11
Enter
trade
Trading stage Transition
stage
Ranging stage
FLOWCHART

14. 12
Flash Crashes
What is a Flash Crash?
A flash crash is a very rapid, deep, and volatile fall in security prices occurring within
an extremely short time period. A flash crash frequently stems from trades executed
by black-box trading, combined with high-frequency trading, whose speed and
interconnectedness can result in the loss and recovery of billions of dollars in a matter
of minutes and seconds.
The Role of HFT in Flash Crashes:
With the advancement of technology, trading has become easier for people. High
frequency trading (HFT) is the best example for this. HFT started back around in
2000s contributing to fewer than 10% of equity orders. Since then, it has been
spreading so swiftly owing to its features like high speed, market efficiency,
introducing liquidity in the market etc. that presently, it contributes to more than 50%
of equity trading. Simultaneously, HFT is becoming more and more complex just like
black box algorithms. It involves unethical means of trading, that may even result in
bankruptcy or may be an event as big as a Flash Crash. So, on this account we are
now going to see, is it just a theory on paper or ever happened too.

15. 2010 U.S.A. Flash Crash:
Just like a normal day on May 6 ,2010 people were following their routines, ate
breakfast, headed for their offices and nothing unusual occurred till then. The stock
market was plummeting on that day due to the Greece debt crisis. But seemed like
clock ticking 2:41pm had different plans for traders.
In the span of a mere four and half minutes, the Dow Jones Industrial Average lost
approximately 1,000 points. At 2:42 p.m., with the Dow down more than 300 points
for the day, the equity fell 600 points in 5 minutes for a loss of nearly 1,000 points for
the day by 2:47 p.m. Twenty minutes later, by 3:07 p.m., the market regained most of
the 600-point drop.
People didn’t know what was going on & till they would have understood anything
and taken any steps, the market started rising and got settled down but the money
that it costed to people was so huge that till now people haven’t recovered from it. It
was quite similar to Ponzi scheme - firstly they persuaded people by showing them the
advantages of HFT and when they succeeded in winning majority of investor’s trust,
they played their game.
13

16. Report by SEC and CFTC:
The SEC and CFTC joint 2010 report said that "May,6 started as an unusually
turbulent day for the markets" and by the early afternoon "broadly negative market
sentiment was already affecting an increase in the price volatility of some individual
securities". At 2:32 p.m. (EDT), against a "backdrop of unusually high volatility and
thinning liquidity" that day, "a large fundamental trader (a mutual fund complex)
initiated a sell program to sell a total of 75,000 E-Mini S&P contracts (valued at
approximately $4.1 billion) as a hedge to an existing equity position". The report said
that it was an unusually large position and that the computer algorithm the trader used
to trade the position was set to "target an execution rate set to 9% of the trading
volume calculated over the previous minute, but without regard to price or time.
THE WALL STREET JOURNAL quoted in the joint report, "HFTs (then) began to
quickly buy and then re-sell contracts to each other, generating a 'hot-potato' volume
effect as the same positions were passed rapidly back and forth." The combined sales
by the large seller and high-frequency firms quickly drove "the E-Mini price down 3%
in just four minutes".
14

17. Main Culprit:
In April 2015, Navinder Singh Sarao, a London-based point-and-click trader, was
arrested for his alleged role in the flash crash. According to criminal charges brought by
the United States Department of Justice, Sarao allegedly used an automated program to
generate large sell orders, pushing down prices, which he then cancelled to buy at the
lower market prices.
But still HFT holds a share of more than 50% in the stock market. SEC has implemented
some laws to prevent another incident like flash crash such as consolidated auditing of
HFT, pigouvian tax schemes, limit on buying and selling of more than a fixed number of
stocks. But no laws or regulation can be imposed on a person’s greed, some people will
always strive to earn more and more may it compromise the ethics.
15
TIM’s TALE (continued)
JIM talks about the US Flash Crash
Let me tell you about the 2010 flash crash...One fine morning of May 6, US Dow Jones starts
feeling a little sick...Then in a matter of a few minutes, all of a sudden it has a heart attack!! More
than 1000 points, which translate to billions of dollars gone up in smoke! And what is even more
astonishing is that within a matter of minutes yet again...it revives (as if someone used shock pedals
to restart the heart!!) And you know amidst all the blabber about the causes HFT is without a
doubt the biggest culprit behind it!

18. Some Other Flash
Crashes of the Market
14
1. AUGUST 1,2012- Collapse of Knight Capital.
The Knight Capital Group was an American global financial services firm engaged in market
making, electronic execution, and institutional sales and trading. With its high-frequency trading
algorithms Knight was the largest trader in U.S. equities, with a market share of 17.3% on
NYSE and 16.9% on NASDAQ. Due to a bug in one of its high-frequency trading algorithms
caused the firm to lose $440 million and led to the stock market crash.
2. OCTOBER 2013- Collapse of Singapore Exchange
In October 2013 a flash crash occurred on the Singapore Exchange which wiped out $6.9
billion in capitalization and saw some stocks lose up to 87% of their value.
3. MARCH 03,2015- Germany dax down by 3.75% or 480 points.
4. OCTOBER 19,1987- Black Monday
One of the biggest crash in the history of stock market. Started in Hong Kong. it affected the
stock market of many countries causing stock markets in Hong Kong, Australia, Spain, the
United Kingdom, the United States and Canada had fallen 45.5%, 41.8%, 31%, 26.45%, 22.68%
and 22.5% respectively.
16

19. Pros and Cons of HFT
High frequency trading has come under the scanner many times in the past, most prominently
after the flash crash in 2010. Though there is no substantial evidence affirming that HFT firms
exploit the non HFT firms, we can safely conclude that there are both advantages and
disadvantages of the same. Let us take a look at the most important issues in this regard.
Advantages:
● HFTs provide liquidity and reduce transaction costs
● HFTs help in price discovery
● In most cases, HFTs help in improving the best price.
Disadvantages:
● Increase impact cost to institutional investors
● Intensify flash crashes
● Front running
● Manipulation techniques like quote spoofing (Sending and cancelling large orders),
stuffing(exploiting slower traders)
● They add no real economic value.
● Unfair advantage due to co-location
Increase in Liquidity is perhaps the strongest argument put forward by the advocates of
HFT.
HFT, in general increases the liquidity, depth in the markets and reduces the transaction
costs, thus helping the retail investors in their trades. Passive HFT firms play the role of
market makers and earn bid/ask spreads and rebates from exchanges. The use of
technology helps the HFT firms to act as market makers eventually helping retail
investors
17
Liquidity
In 2009, HFT Traders moved
3.25 billion shares a day.
In 2012, it was 1.6 billion a day.

20. However, the case is reversed for institutional investors. For example,
HFTs can access the information regarding routing of large orders by
institutional investors. HFTs can further guess the exchanges accessed
by Institutions, observe the increase in bid/ask spread etc. When they
confirm that there is an institutional investor involved, they jump into
the market and try to buy all the stock that is available which they later
can sell as the price starts going up. The overall result is the increase in
market impact for the institutional investors. In recent times, it has
become very difficult to spot such opportunities as many mutual funds,
institutions now have advanced programs that can fool the pattern
recognition systems. Besides the argument about liquidity, there are
several frowned upon strategies that are employed by HFTs which
increase market impact to institutional investors. These are momentum
detection, order flow prediction and detection, Latency arbitrage etc.
18

21. In stark contrast to the above discussion, some people argue that HFTs increase
only volume and not liquidity. This can also be proven using statistical data. One
more point that needs to be noted is HFTs may not be the source of liquidity
when it is most needed.
The argument that HFTs do not add economic value may seem sound but there
had been intraday traders from the very beginning of the market who bought
and sold without any fundamental change in the asset’s value. HFT is just a
technological advancement that needs to be incorporated into our market system
because of its sheer productivity if utilized properly.
Front running:
While there may be divided opinions on some effects of HFT, there is no doubt
HFT does more harm than good when it comes to front running. Front running is
often compared to insider trading. Traditionally, front running is when a broker
traders ahead of his client when he receives an order. When it comes to HFT, this
refers to a very fast computer that executes the trade for HFT firm in milliseconds
and then offers the resulting price to the trader who originally placed the order.
Despite the various disadvantages, there is no doubt that the narrowing of
bid/ask spreads has made it easy for everyone to trade in the markets. Also, there
has been empirical evidence showing the reduction in distortion of end of day
prices in exchanges after the arrival of HFTs.
In conclusion, there are both pros and cons to the HFT. But we are sure HFT is
here to stay and there is a need for proactive surveillance on the part of
regulators to continuously monitor the activities of HFT. Efficient and fair
exchanges free from manipulations should be the ultimate aim of any regulator.
19
A Technology firm built a straight
line between a data centre in Chicago
and Nasqad's server in New Jersey
buying lang and building tunnels through
the Allegany mountains that shaved 3 ms
off the time it takes to communicate
between two cities. The project costs
were $300 million.

22. The Future of
High Frequency rading
20
HFT literally is what it says it is: “a platform that allows for the purchase and
selling of financial instruments, in enormous volumes within milliseconds”. It hasn’t
been a very old native of the financial market. Introduced first by Ronan Ryan with
its major consequence observed back in the Flash crash of U.S.A. 2010, HFT has
made a severe leap. The practice existed, but at a small scale. Now, the average
trade in the U.S. happens at almost 98% of the speed of light, with approximately
an order of 10^8 m/s and that is enormous.
In 2009, high frequency trading firms accounted for 60-73% of the U.S. equity
trading firms but they declined to 50% in 2012 due to the flash crashes. Where on
one hand, HFT may provide lofty profits, it had on the other hand incurred losses
of more than $440,000,000 driving some firms absolutely bankrupt. Situations
might fall for even worse consequences causing complete portfolios to collapse in
case of a mass sell-off occurring in milliseconds. Quite contrarily, HFT is also seen to
stabilize the market by closing spreads between buying and selling markets.
With numerous views, counter views, pros and cons - the inevitable fact is it has
widened the scope of the market and would further develop with new rising
technologies and market. But it sure is likely to witness a sharp future drastically
regulated. There are chances some regulators come down hard on HFT because of
the front end abuses and flash crashes it’s been responsible for and some countries
even out rightly banning HFT. With increasing demand of HFT, there’ll be more
firms adopting this technique thus diminishing the margin of the profit. HFT isn’t
certainly a technology vain enough to die but it might subsume with time and with
more competitive technologies.

23. Counter arguments to this suggest, in future, there’ll be more market
players, more liquidity and more trading volume that could only be
handled by HFTs. Anyhow, HFT might be the basis of trade in future
or one of the bases of trade. It faces quite a few challenges namely the
operational issues involved, entry barriers - involving enormous capital
investments to own the HFT technologies. It is entitled to risks - a failure
of the algorithm, an unexpected turn of the market and the curbing
effects of the continuous regulations imposed and retrieved on HFT by
the government of various countries. Furthermore, it is prone to
controversies and criticisms.
The technology at present stands at a crossroad. The repressing effects
of the various legitimate regulations and risks overpower the huge
potential this technique bestows. It would still be early to decide a
definite future for HFT. It will have its time in the sun and it will be
supplanted. However, it is almost impossible to predict as to what will
supplant it.
21

24. Extras
22

25. HFT vs Car Racing
It should not sound as an over-obsession with Asphalt when stating that throughout our
project of High Frequency Trading it seemed as if it were a Car Racing Competition. It
had players (/ traders) that were professional, smart and skilled and the ones who
played, entirely falling back on Miss Fortune and then there were the wicked ones
who’d silently put in a ‘bait’ and significantly remove competition.
People would race at high speeds. Apparently, High Frequency Traders were the ones
owning the most sophisticated and uniquely designed Formula 1’s. Traders would flash
bid, drawing out the last bit of air from their opponents car and the opponent, if not
smart enough would lose right there, plunge into the snares of delusion and quit the
stock market then and there. Some would slyly install the very discussed black-box in the
opponent’s car and there it goes – Boomm! exploding right in the middle of the race.
It intensively mattered how close you were to the destination – the exchange and if you
already weren’t, you would resort to all deliberate, desperate measures to be there. The
shorter, smarter route you followed, the more heavily rewarded you will be. The more
winning cars you bet on, the more profit you make. And then there’d often be this one
competitor – the newbie- who suddenly emerges out of nowhere and win the
market/the race all my himself, once again with the smart use of a black box or using
false flash bids or by well analysing the moves of all the smart players, spotting the
loophole in them and taking advantage of the same.
High frequency Trading and car racing have thus, a striking analogy. Both lead you into
an overdrive, causing a rush of adrenaline through each trader – institutional, high
frequency traders or the small, manual traders affecting them with every crest and
trough in the market, with every roller-coaster in the drive. And with this drastic
resemblance comes the obvious fact – every single person who plays the game is madly
fanatic about it.
JIM’s fabulous reassurance......
Well TIM, I know you think that HFT belongs to the parallel world. But relax...it’s been created only
by Humans! After all, have some faith in me, your Financial Doctor. Years of experience have taught
me that HFT moves can not only be spotted and analyzed, but also profited from! Let me show you
a recent example of HFT at play in our own market on 28th Feb! And then you’ll believe me.
(As JIM shows the financial analysis (shown above) of 28th Feb to TIM...he is once again satisfied
and pleased with the skill and precision of thefinancialdoctorsindia.com!!)
23

26. Conclusion
This report hence, provides an overview of High Frequency Trading in the equities and
derivatives markets regulated by the SEC and the CFTC. It also examines the Flash Crash of
2010 and the role that HFT may have played, as well as recent regulatory developments.
On May 6, 2010, the Dow Jones Industrial Average (DJIA), a broad stock index, fell by
nearly 1,000 points over the course of several minutes and then quickly rebounded being one
of the largest intraday declines in the history of the DJIA. Dubbed as the Flash Crash, the
event led to several analytical studies and reports and to greater scrutiny of a broad trading
protocol known as high-frequency trading (HFT).
High-frequency trading (HFT) is a broad term without a precise legal or regulatory definition.
It is used to describe what many characterize as a subset of algorithmic trading that involves
very rapid placement of orders, in the realm of tiny fractions of a second. Algorithmic Trading
is the use of computer algorithms to automatically make certain securities trading decisions,
submit securities trades, and manage those securities orders after their submission.
Having discussed its significant impact on the market, investigating upon the myths and
questions about it raising the phantom liquidity and volatility have helped develop a better
understanding of the practical trade, the high frequency trading, baits at exchanges and the
manipulation by black-boxes. The report also attempts to put a fair view- counterview on the
HFT practices stating its pros and cons as per various aspects.
The Financial Doctors, India provides with a pre-detection of High Frequency Trading
practices, to compensate and rather take advantage of these moves thereby, multiplying the
investors’ money. It serves to provide breakthrough counter techniques to deal with all the
latest techniques cropping up in the market. One such technique has been this very discussed-
High Frequency Trading.
24

27. 1. https://en.wikipedia.org/wiki/2010_Flash_Crash
2.https://en.wikipedia.org/wiki/Associated_Press#Hoax_tweet_and_flash_cra
3. http://www.tradeciety.com/facts-about-high-frequency-trading/
4. https://en.wikipedia.org/wiki/Black_Monday_(1987)
5. https://en.wikipedia.org/wiki/Knight_Capital_Group
6. http://business.time.com/2012/08/08/high-frequency-trading-wall-streets-doomsday-machine/
7. http://moneymorning.com/2013/05/08/a-look-back-at-the-flash-crash-of-2010-when-will-it-
happuen-again/
8. http://blogs.wsj.com/deals/2010/05/06/four-mega-drops-of-the-flash-crash-sam-adams-goes-
flat/
9.http://datascienceassn.org/sites/default/files/The%20Microstructure%20of%20the%20%E2%80
%98Flash%20Crash%E2%80%99%20-
%20Flow%20Toxicity,%20Liquidity%20Crashes%20and%20the%20Probability%20of%20Infor
med%20Trading.pdf
10. http://www.theatlantic.com/business/archive/2014/04/everything-you-need-to-know-about-
high-frequency-trading/360411/
11. http://www.economist.com/blogs/newsbook/2010/10/what_caused_flash_crash
12. https://www.capgemini.com/resource-file-
access/resource/pdf/High_Frequency_Trading__Evolution_and_the_Future.pdf
13. http://themarketmogul.com/high-frequency-trading-future/
14. http://www.chicagobooth.edu/capideas/magazine/summer-2015/how-high-frequency-trading-
is-changing-what-we-know-about-the-market
15. Business Insider, The real problem with high-frequency trading - Usman W. Chohan, The
Conversation
16. Congressional Research Service: High-Frequency Trading: Background, Concerns, and
Regulatory Developments Gary Shorter Specialist in Financial Economics Rena S. Miller Specialist
in Financial Economics
17. Inside the Black Box, The Wall Street Journal - By David Weidner
18. Algotrades : Is Blackbox trading and investing the way of the future?
19. https://en.wikipedia.org/wiki/High-frequency_trading
20. http://www.marketwatch.com/story/heres-the-advantage-high-frequency-trading- firms-
have-over-everyone-else-2015-08-13
25
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