BUFN758X

Nathan Wang
What is latency? How has it changed in recent years?
Latency is the time it takes to learn about an event, generate a response, and have the
exchange act on the response. Latency especially in trading has been extraordinarily
reduced in recent years.

What are the key drivers of the changes in latency?

One of the most significant driver is the market volatility, as the market event or public
information drives the stock price rapidly. The low latency becomes significantly
important. A millisecond delay make cause exponential loss in large quantity trading. The
other key driver is the high frequency trading strategy that the traders are implementing,
in order to make the high frequency trading, the system must make minimal latency to
execute the orders.
What makes a high frequency trading strategy today different from a typical
market-making strategy in the past?
Typical market-making strategy do not need millisecond response to the changing market
conditions. High frequency trading strategy responds to market event in milliseconds,
which is extremely fast.
Why is trading highly concentrated in a small number of high frequency trading
firms?
Because such algorithms are employed by hedge funds, and only small number of high
frequency trading firms already involves high percentage of the trading volume in
NASDAQ.
What are some examples of HFT firms?
Virtu Financial, IMC, Tower Research Capital, and Citadel LLC.
What does high frequency trading suggest about the trade-offs between private
benefits and social benefits?
The trade-offs between private benefits and social benefits are hard to determine. It
maybe harmful or improve the market quality in aggregate for long-term investors. One
argument is that the HFT aid price discovery by eliminating the price difference, but at
such a short time it is difficult to determine the true value of the security.
For how long do high frequency traders hold inventories?
They usually hold their inventory for a very short time, never longer than a day.
What is a "stale quote" ?
A stale quote is a quote that only reflects the old market event, that is not updated to the
most recent market information.
Do high frequency traders attempt to make money with market orders or limit
orders? Why?
They make more money with limit order, since all submitted orders must be price
contingent. Market order’s executed price is not under control of the high frequency
traders.

(Optional for extra credit; if you do it, please submit it as part of the assignment) Do
high frequency traders prefer a market with a large tick size or a small tick size?
I believe high frequency traders prefer small tick size, because small tick size make their
limit order more flexible, their order price could be more precise to execute the order.

Reference:
Hasbrouck, Joel, and Gideon Saar. 2013. “Low Latency Trading.” Journal of Financial
Markets, Vol. 16, pp. 646–679. Hasbrouck_Saar.pdf