Chapter 1: Fundamentals of a High-Frequency Trading System
Welcome to Developing High-Frequency Trading Systems!
High-Frequency Trading (HFT) is a form of automated trading. For the last twenty years, HFT has gained recognition in the media and in society. A book called Flash Boys: A Wall Street Revolt, written by Michael Lewis in 2014, topped the sales on the New York Times Best Seller list for three weeks. It relates to an investigation into the HFT industry and its impact on the trading world. Scholars, the financial world, and the non-financial world are fascinated by this form of trading. Meanwhile, this new era of trading has created a lot of fear while giving more and more control to machines.
The goal of this book is to review what HFT is and how to build such a system from a technical perspective. HFT is a multi-disciplinary matter involving thorough knowledge of computer architecture, operating systems, networking, and programming. By the end of this book, you will understand how to build a trading system from scratch by using the most advanced technical choices for optimizing speed and scalability. We chose to divide this book into three main parts.
In the first part, we'll go through how HFT tactics function and what kind of trading we may expect from HFT. Then we will go over the functions of an HFT system. We will conclude this part with a description of how a trading exchange works.
In the second part of this book, we will explain the theory of operating systems and hardware and the required knowledge to optimize a trading system, taking into account the hardware and operating system features.
The final part will explain in detail how to use C++, Java, Python, and FPGA to create an HFT system. We will also extend this knowledge to crypto trading, and we will review how to build a trading system in the cloud.
In this chapter, we will talk about how we got into HFT. We will review what kind of trading strategies work for HFT. We will explain in detail what makes HFT so different from regular trading.
Our objective in this chapter is to cover the following topics:
- History of HFT
- What HFT is
- Who the participants are
- What trading strategies work in HFT
