In HFT, a microsecond (millionth of a second) is eternal. Firms compete to be closer to the exchange's matching engine (Co-location) to reduce latency by nanoseconds, limited only by the speed of light through fiber optic cables.
Technical Architecture
Unlike traditional web apps that use HTTP/REST, HFT systems rely on specialized TCP/IP stacks and multicast protocols.
- Co-location: Placing servers in the same data center as the exchange (e.g., NASDAQ's NJ facility) to minimize physical distance.
- Kernel Bypass: Using technologies like Solarflare or DPDK to skip the operating system's network stack for faster packet processing.
- FPGA (Field-Programmable Gate Arrays): Encoding trading logic directly into hardware chips for consistent nanosecond-level execution times.
Protocols: FIX vs. Binary
While the Financial Information eXchange (FIX) protocol is the standard for communication, HFT firms often use proprietary binary protocols provided by exchanges (e.g., OUCH by NASDAQ) which are more compact and faster to parse than text-based FIX messages.
Algorithms and Strategies
Common strategies include:
- Market Making: Providing liquidity by placing both limit buy and limit sell orders to earn the bid-ask spread.
- Statistical Arbitrage: Identifying and exploiting pricing inefficiencies between related assets across different exchanges.
Building HFT Infrastructure
Alterra Solutions provides the foundational Fintech Software required for institutional trading desks. From low-latency connectivity adapters to risk management layers that don't compromise speed.