HIGH-FREQUENCY TRADING

falling. You analyze a million occurrences of this falling event, and along with some of the greatest minds you know, you discover gravity. It’s perfect: you can model it, define it, measure it, and predict it. You test it with your colleagues and say, ‘I will drop this apple from my hand, and it will hit the ground in 3. 2 seconds,’ and it does. Then two weeks later, you go to a large conference. You drop the apple in front of the crowd… and it floats up and flies out the window. Gravity is no longer true; it was, but it is not now. That’s HFT. As soon as you discover it, you have only of few weeks to capitalize on it; then you have to start all over.”

the hft technology stack

What follows is a high-level overview of the modern HFT stack. It is broken into components, though in a number of shops these components are encapsulated in a single piece of hardware, often as FPGA.

Collocation. The first step in HFT is to place the systems where the exchanges are. Light passing through fiber takes 49 microseconds to travel

10,000 meters, and that is all the time
available in many cases. In New York,
there are at least six data centers you
need to collocate in to be competitive
in equities. In other assets (for exam-
ple, foreign exchange), you need only
one or two in New York, but you also
need one in London and probably one
in Chicago. The problem of collocation
seems straightforward:

1. Contact data center.

2. Negotiate contract.

3. Profit.

The details, however, are where the first systems problem arise. The real estate is extremely expensive, and the cost of power is an ever-crushing force on the bottom line. A 17.3-kilowatt cabinet will run $14,000 per month. 7 Assuming a modest HFT draw of 750 watts per server, 17 kilowatts can be taken by 23 servers. It’s also important to ensure you get the right collocation. In many markets, the length of the cable within the same building is a competitive advantage. Some facilities such as the New York Stock Exchange (NYSE) data center in Mahwah, NJ, have rolls of fiber so that every cage has exactly the same length of fiber running to the exchange cages. 3

Networking. Once the servers are
collocated, they need to be connect-
ed. Traditionally this is done via two
methods: data-center cross connects
(single-mode or multimode fiber); and
cross-data-center WAN links.

The Cross Connect and NAT. Inside the data center are multiple exchanges or market-data feeds. Each endpoint must conform to the exchange transit network. This is a simple Network Address Translation (NAT) problem and can be tackled at the switch level, as shown in Figure 1. Multiple vendors (for example, Arista2) offer hardware-based NAT at the port level. For some marketplaces (foreign exchange) there may be as many as 100 such NAT endpoints within a single data center.

The key to the internal NAT problem is the core nature of trading: correlated bursts. These bursts are what make HFT networks so ridiculously difficult. Figure 2 is a screenshot of an internal monitoring application that shows the packet-per-second rates for a (small) collection of symbols moving together during an ISM announcement. The Institute of Supply Management (ISM) manufacturing composite index is a diffusion index calculated from five of the 11 subcomponents of a monthly survey of purchasing managers at approximately 300 manufacturing firms in the U.S. At 14:00 EDT the ISM announcement is made, and a burst occurs. Bursts like this are common and happen multiple times a day.

As the world becomes more interconnected, and assets are more closely linked electronically, these bursts can come from anywhere. A change in U.K. employment will most certainly affect the GBP/USD rate (currency rates are like relative credit strength). That in turn affects the electronic U.S. Treasury market, which itself affects the options market (the risk-free rate in our calculations has changed). A change in op-

figure 3. WAn links: high-throughput path and lower-throughput fast path.

Colo 2

Microwave

10GbE Fiber

10GbE
Fiber
Fiber
Colo 1

Millimeter Wave
Colo 3
Microwave

figure 4. feed handler parsing market-data feeds.

Fe
e
d
Ha
n
dl
e
r
Encode in
internal structure
Construct
Order Book
Data
Parse Market
Data
Parse Market
Data
Parse Market
Data
Receive Data
Off Wire
Receive Data
Off Wire
Receive Data
Off Wire
Receive Data
Off Wire
Raw Market Feed
Raw Market Feed
Raw Market Feed
Raw Market Feed
Normalized Feed