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HIGH FREQUENCY
T RA D I N G
with C++

Hayden Van Der Post

Reactive Publishing
 CONTENTS

Title Page
Preface
Chapter 1: Introduction to High-Frequency Trading
Chapter 2: Technical Foundations of High-Frequency Trading
Chapter 3: C++ Programming for HFT
Chapter 4: Quantitative Analysis and Model Building
Chapter 5: Algorithm Optimization and Enhancement
Chapter 6: Risk and Compliance Management in HFT
Chapter 7: System Architecture and Design
Chapter 8: Testing and Optimization
Chapter 9: Deployment and Monitoring
Additional Resources
C++ Principles
HFT Strategies
How to Create a HFT program with C++
Sample HFT Program with C++
 PREFACE

To My Esteemed Reader,

Welcome to a journey through the fascinating world of high-

frequency trading (HFT) with C++ at its core. This book is
born from a deep-seated passion for the financial markets
and the technology that drives them. It's about bridging the
gap between the complex algorithms that pulse beneath the
surface of the markets and the individuals who harness
them to create something truly remarkable.

In these pages, I invite you to delve into the heart of HFT

strategies, where milliseconds can mean the difference
between success and failure. This isn't just a book about
code; it's about the beating heart of the market, the thrill of
the trade, and the relentless pursuit of excellence. C++ is
our vessel, a language powerful enough to capture the
speed and intricacy of the market, and through it, we will
explore the strategies that define modern trading.

My journey into the world of high-frequency trading was not

a straightforward one. It was paved with challenges,
learning curves, and the relentless pursuit of knowledge. I
remember the early days of staring at screens filled with
code, feeling both exhilarated and daunted by the task
ahead. But the beauty of C++ and the allure of the financial
markets kept me anchored, driving me to delve deeper, to
understand more fully, and to strive to demystify the
complexities of HFT.

This book is a culmination of years of experience,

experimentation, and learning. It is designed to offer you a
clear, concise, and practical guide to mastering HFT
strategies with C++. Whether you are a seasoned trader
looking to refine your strategies, a developer eager to
unlock the potential of C++ in the trading world, or simply
someone fascinated by the intersection of finance and
technology, there is something in these pages for you.

I have endeavored to make this book as accessible and

engaging as possible, stripping away the unnecessary
jargon and focusing on what truly matters. It is my hope
that it will not only educate but also inspire you to explore
the limits of what is possible in the realm of high-frequency
trading.

As we embark on this journey together, I encourage you to

approach it with an open mind and a curious heart. The
world of HFT is constantly evolving, and there is always
more to learn, more to explore, and more to achieve. So, let
us step into this world together, armed with C++, ready to
unlock new horizons and forge our path to success.

Thank you for choosing to embark on this journey with me.

Let's make it a remarkable one.

Warmest regards,
Hayden Van Der Post
 CHAPTER 1:
INTRODUCTION TO
HIGH-FREQUENCY
TRADING
In the pantheon of modern finance, few innovations have
revolutionized the way markets operate quite like High-
Frequency Trading (HFT). This technique, characterized by
rapid trade execution, advanced algorithms, and an
insatiable appetite for data, marks a seismic shift from
traditional trading methodologies. It is within this high-
octane environment that C++ has emerged as the lingua
franca, equipping traders with the tools to navigate the
frenetic pace of today’s financial exchanges.

HFT is an algorithmic trading strategy that utilizes powerful

computers to transact a large number of orders at lightning-
fast speeds. These high-speed trading platforms can
execute orders in fractions of a second, capitalizing on
minute price discrepancies across different markets. The
essence of HFT lies not just in the speed, but in the
sophistication of the algorithms that drive decision-making
processes, enabling traders to outmaneuver competitors in
the quest for profitability.

Tracing its origins back to the early 2000s, HFT has evolved
from a niche activity to a dominant force in global finance.
Initially, HFT firms sought to leverage speed as their primary
strategy, but as the landscape became more competitive,
the focus shifted towards complexity and efficiency.
Algorithms have grown increasingly sophisticated,
incorporating elements of machine learning and artificial
intelligence to predict market movements with astonishing
accuracy.

C++ sits at the heart of High-Frequency Trading operations.

Its unparalleled performance and efficiency make it an ideal
choice for developing trading algorithms that require both
speed and complexity. C++ offers fine-grained control over
system resources, a critical feature for HFT where every
microsecond counts. Additionally, advanced features such
as template metaprogramming and concurrency
mechanisms allow for highly optimized code that can
process massive amounts of data in real time.

The ethos of HFT revolves around precision, speed, and

adaptability. Precision, in ensuring that algorithms are
meticulously designed to execute trades based on specific
market conditions. Speed, in the relentless pursuit of
reducing latency to gain an edge over competitors. And
adaptability, in the constant refinement of strategies to stay
ahead in a rapidly evolving financial ecosystem.

HFT has undeniably left an indelible mark on financial

markets. It has enhanced liquidity, narrowed bid-ask
spreads, and contributed to more efficient price discovery.
However, it has also sparked debates regarding its impact
on market stability and fairness. As we delve deeper into the
nuances of HFT, it becomes apparent that understanding its
mechanics is crucial for anyone looking to navigate the
modern financial landscape.
Charting the Course from Tradition to Technological Triumph

In the annals of trading history, floor trading stands out as

the original arena where buyers and sellers converged.
Picture the New York Stock Exchange in its early days: a
bustling hive of human activity, where traders shouted
orders and gestured wildly, a process known as open outcry.
This method, although effective for its time, was inherently
limited by human speed and the physical constraints of the
trading floor.

The advent of electronic trading in the late 20th century

heralded a new era in the financial markets. This transition
was not instantaneous but a gradual shift that started with
the automation of order matching and evolved into fully
electronic exchanges. The revolution began quietly, with the
introduction of electronic communication networks (ECNs)
facilitating after-hours trading, eventually leading to the
establishment of NASDAQ as the first electronic stock
market.

The move to electronic platforms did more than just

eliminate the physical barriers; it democratized access to
the markets, enabling traders worldwide to participate
without the need for physical presence. This global
participation, coupled with the increased speed of
transactions, laid the groundwork for the next leap in
trading strategies.

As the markets embraced electronic trading, the stage was

set for the emergence of algorithmic trading. This strategy
leverages computer algorithms to execute trades at speeds
and volumes that are beyond human capability. The essence
of algorithmic trading lies in its ability to parse vast
amounts of data, identify trading opportunities based on
predefined criteria, and execute orders within milliseconds.

Algorithmic trading began as simple automated strategies,

like arbitrage, but rapidly evolved to encompass a diverse
range of tactics, including market making, statistical
arbitrage, and sentiment analysis. The sophistication of
these algorithms has grown in tandem with advancements
in computing power and data analysis techniques, ushering
in an era of high-frequency trading (HFT).

High-Frequency Trading represents the zenith of algorithmic

trading's evolution. HFT strategies exploit minute price
discrepancies across different markets, executing orders in
fractions of a second. The introduction of HFT has
significantly increased liquidity and efficiency in the
markets, although not without controversy regarding its
impact on market volatility and fairness.

The evolution from floor trading to algorithmic trading, and

ultimately to HFT, has been underpinned by advances in
technology, with C++ playing a critical role. C++ has
enabled the development of complex trading algorithms
that require high performance and low latency. Its capacity
for resource control, combined with advanced features like
concurrency, makes it the preferred language for
implementing the sophisticated algorithms that drive
modern trading strategies.

This transformative journey from the chaos of the trading

floors to the precision of algorithmic trading underscores the
financial markets' relentless pursuit of efficiency. Each stage
of evolution has brought about significant changes in how
trades are executed and how markets operate, reflecting
the continuous interplay between finance and technology.
The evolution of trading strategies is far from over. With
advancements in artificial intelligence, machine learning,
and quantum computing on the horizon, the future of
trading promises to be as dynamic as its past. As we stand
on the cusp of these technological frontiers, one thing
remains clear: the journey from traditional floor trading to
algorithmic trading is a testament to the indomitable spirit
of innovation that drives the financial markets forward.

Historical Perspective on Trading Methodologies

In the nascent stages of human society, the barter system

was the cornerstone of trade, a simple yet effective method
of exchange. Goods were traded directly for other goods
without a standard currency, relying heavily on the mutual
needs of the parties involved. This method, while
foundational, was limited by the lack of a common measure
of value and the difficulty in storing wealth.

The introduction of currency as a medium of exchange was

a revolutionary development in trading methodologies. It
facilitated transactions over larger distances and among a
broader network of traders, setting the stage for the
emergence of trade routes that crisscrossed continents. This
era witnessed the birth of commodity money, where items
such as gold, silver, and even salt served as universal
measures of value, enabling traders to accumulate wealth
and invest in larger ventures.

As trade expanded, the need for more sophisticated

financial mechanisms became evident, leading to the
establishment of the first banks in medieval Italy. These
institutions initially served to safeguard the wealth of
traders but soon began to offer loans, effectively multiplying
the capital available for trade. This period also saw the
emergence of bills of exchange, precursors to modern-day
cheques, which allowed traders to settle debts across long
distances without the need to transport currency.

The 17th century marked the inception of stock exchanges,

beginning with the Amsterdam Stock Exchange, the world's
first official stock market. This innovation democratized
trading methodologies by allowing individuals to own shares
in companies and participate in their profits. The concept of
joint-stock companies facilitated the pooling of resources for
large trading ventures, spreading the risk among multiple
investors and laying the groundwork for the modern
corporation.

The introduction of the telegraph in the 19th century

revolutionized trading methodologies by making it possible
to transmit financial information across vast distances in
real-time. This technological leap reduced the information
asymmetry between different markets, leading to more
synchronized prices and the birth of the modern financial
news industry.

The latter half of the 20th century witnessed the advent of

electronic trading, a development that has arguably had the
most profound impact on trading methodologies. Beginning
with the NASDAQ in 1971, the world's first electronic stock
market, this period saw the digitalization of exchanges,
eliminating the need for physical trading floors. Electronic
trading platforms have since enabled unprecedented levels
of market access, liquidity, and speed, laying the foundation
for algorithmic and high-frequency trading.

Today, trading methodologies are dominated by algorithmic

strategies that leverage computational algorithms to
execute trades based on predefined criteria. The evolution
from manual to algorithmic trading represents a culmination
of centuries of financial innovation, enabling traders to
interact with markets in ways that were previously
unimaginable.

The historical journey from barter to algorithmic trading is a

testament to human ingenuity and the relentless pursuit of
efficiency in the markets. Each phase of this evolution has
been driven by technological advancements and a
deepening understanding of financial principles,
contributing to the complex, interconnected global
marketplace we navigate today.

Emergence of Electronic Trading Platforms

The transition from traditional floor trading to electronic

trading platforms marks a pivotal chapter in the evolution of
financial markets. This transformation has not only altered
the operational dynamics of trading but has also
democratized access, enhanced market efficiency, and
accelerated the pace at which trading occurs.

The inception of electronic trading can be traced back to the

early 1970s with the launch of NASDAQ, the world's first
electronic stock market. Unlike traditional exchanges that
relied on floor traders to make transactions, NASDAQ
introduced a computerized system that could execute
trades almost instantaneously. This innovation was the
harbinger of a new era in trading, showcasing the potential
of technology to revolutionize financial markets.

Following NASDAQ's lead, other markets began to explore

electronic trading possibilities. By the late 1980s and early
1990s, electronic trading systems were being adopted
worldwide, from the London Stock Exchange's SEAQ system
to the Toronto Stock Exchange's CATS. Each iteration
brought improvements in speed, efficiency, and
accessibility, gradually rendering floor trading obsolete.

One of the most significant impacts of electronic trading

platforms has been the democratization of market access.
Prior to their advent, the trading arena was dominated by
professional traders and large institutions. Electronic
platforms leveled the playing field by enabling retail
investors to participate directly in financial markets. Today,
with an internet connection and a trading account,
individuals can trade stocks, currencies, and other financial
instruments from anywhere in the world.

The backbone of electronic trading platforms is an intricate

infrastructure designed to handle vast volumes of
transactions with precision and speed. Central to this
infrastructure are sophisticated algorithms that match buy
and sell orders, manage risk, and ensure regulatory
compliance. Moreover, the global nature of financial
markets necessitates a network that spans data centers
across continents, ensuring seamless connectivity and
redundancy.

The rise of electronic trading platforms has also spurred

innovation in financial products and services. Exchange-
Traded Funds (ETFs), algorithmic trading, and high-
frequency trading (HFT) are all byproducts of the digital
trading era. These innovations have contributed to the
complexity and diversity of modern financial markets,
offering traders a wide array of strategies and instruments.

Despite the numerous benefits, the shift to electronic

trading has not been without challenges. Issues such as
market fragmentation, flash crashes, and concerns over
cybersecurity have prompted ongoing debates about the
implications of electronic trading for market stability and
integrity. Furthermore, the rise of algorithmic and high-
frequency trading has raised ethical questions about
fairness and transparency in markets.

The emergence of electronic trading platforms represents a

monumental leap in the history of financial markets. From
the early days of NASDAQ to the sophisticated global
networks of today, electronic trading has transformed the
fabric of the financial industry. As we continue to navigate
this digital landscape, it is clear that the journey of
innovation is far from over, with new challenges and
opportunities on the horizon. This ongoing evolution
reaffirms the critical role of technology in shaping the future
of trade, ensuring that markets remain vibrant, inclusive,
and efficient.

Shift Towards Algorithmic and HFT Strategies

Algorithmic trading involves the use of computer programs

to execute trades based on predefined criteria, without
human intervention. The seeds for this revolution were sown
in the late 20th century, as traders began to leverage the
power of computers to gain an edge in the markets. Initially,
these programs were rudimentary, focusing on simple tasks
such as automated order submission. However, as
technology advanced, so too did the complexity and
capabilities of trading algorithms.

High-frequency trading, a subset of algorithmic trading,

takes the concept to its extreme, focusing on executing a
large number of orders at very fast speeds. HFT firms utilize
sophisticated algorithms to analyze multiple markets and
execute orders based on market conditions in milliseconds,
or even microseconds. This relentless pursuit of speed has
led to innovations in trading infrastructure, including the use
of co-location services to reduce latency and the
development of ultra-fast data feeds.

Two primary forces have driven the widespread adoption of

algorithmic and HFT strategies: the potential for profit and
the competitive necessity. The early adopters of these
strategies reaped substantial rewards, capturing fleeting
inefficiencies in the market faster than their human
counterparts could. This success did not go unnoticed,
prompting a race among firms to develop their own
algorithms and HFT strategies to stay competitive.

The proliferation of algorithmic and HFT strategies has had

profound implications for market dynamics. On one hand,
they have contributed to increased liquidity and reduced
spreads, benefitting all market participants. On the other
hand, their presence has led to concerns regarding market
volatility, with instances like the Flash Crash of 2010
highlighting the potential for sudden market movements
caused by algorithmic trading.

The shift towards algorithmic and HFT strategies has also

prompted intense debate over ethical and regulatory
considerations. Critics argue that these strategies can
create an uneven playing field, where only participants with
the resources to develop sophisticated algorithms can
compete effectively. In response, regulators around the
world have begun to implement measures aimed at
ensuring fairness and transparency in markets dominated
by algorithmic trading.

Looking forward, the landscape of algorithmic and HFT

strategies is poised for continued evolution. Emerging
technologies such as artificial intelligence and machine
learning are being integrated into trading algorithms,
enabling them to make more sophisticated decisions and
adapt to changing market conditions. Moreover, regulatory
and technological advancements are likely to shape the
development of these strategies, balancing the pursuit of
efficiency with the need to ensure market stability and
integrity.

The transition towards algorithmic and HFT strategies marks

a significant paradigm shift in the world of trading. From the
early days of manual execution to the current era of
automated trading, this evolution reflects the relentless
drive for innovation in the pursuit of market efficiency. As
we navigate this complex and ever-changing landscape, it is
clear that the journey of algorithmic and HFT strategies is
intrinsically linked to the broader narrative of technological
progress in financial markets. The future of trading, while
uncertain, promises to be as dynamic and transformative as
the path that led us here.

Defining High-Frequency Trading: Understanding the

Speed and Strategy

The cornerstone of HFT is its unparalleled speed, a factor

that not only defines its operational ethos but also its
strategic advantage. HFT leverages cutting-edge
technology, from sophisticated algorithms to ultra-low
latency networks, to analyze and act upon market data at a
pace that outstrips traditional trading methodologies. This
quantum leap in speed allows HFT firms to exploit minuscule
price discrepancies across different markets, a practice that,
while individually yielding tiny margins, cumulatively
translates into significant profits.

The algorithms used in HFT are marvels of computational

finance, designed to identify patterns and execute trades
with a precision and speed unattainable by human traders.
These algorithms are constantly refined, incorporating vast
datasets to enhance their predictive accuracy and
responsiveness to market signals. From statistical arbitrage
to market making, the strategies employed are diverse,
each algorithm meticulously tailored to capitalize on specific
market conditions or inefficiencies.

Underpinning the speed of HFT is a robust technological

infrastructure that minimizes latency—the delay between
the initiation and execution of a trade. Firms invest heavily
in state-of-the-art hardware and software, including custom-
built servers and proprietary trading platforms. Moreover,
the strategic positioning of these servers in close physical
proximity to exchange data centers, a practice known as co-
location, further shaves off crucial milliseconds from trade
execution times.

While speed is the lifeblood of HFT, the strategies it

empowers are equally sophisticated. HFT strategies are
meticulously designed to maintain a delicate balance
between speed, accuracy, and risk. These strategies range
from liquidity provision, where firms act as market makers,
to momentum trading, which seeks to capitalize on short-
term price trends. The common thread binding these
strategies is their reliance on the rapid execution of trades
to exploit temporary market inefficiencies before they
dissipate.
The meteoric rise of HFT has not been without controversy,
sparking debate within financial circles and among
regulators. Critics argue that the speed advantage of HFT
may contribute to market instability, as seen in events like
the Flash Crash of 2010. This has led to increased scrutiny
and regulatory intervention designed to level the playing
field and mitigate systemic risks, shaping the operational
landscape that HFT firms navigate.

As we peer into the future of HFT, it is evident that the

trajectory of this high-velocity trading paradigm will be
shaped by advances in technology, regulatory changes, and
evolving market structures. The integration of emerging
technologies such as artificial intelligence and quantum
computing promises to usher in a new era of HFT, further
pushing the boundaries of speed and strategy. However, this
evolution will also require a recalibration of regulatory
frameworks to ensure that the dynamism of HFT contributes
positively to market liquidity and efficiency, while
safeguarding against potential pitfalls.

High-Frequency Trading represents a confluence of speed,

strategy, and technology, each element playing a crucial
role in its execution and efficacy. Understanding HFT
requires a deep dive into the mechanics of its operations,
the precision of its algorithms, and the infrastructure that
enables its lightning-fast trades. As HFT continues to evolve,
it remains a compelling testament to the transformative
power of technology in finance, continuously reshaping the
landscape of trading as it strides into the future.

Characteristics of HFT – Speed, Algorithms, and

Infrastructure
Algorithms are the brains of the HFT operation, the
strategists that decide when, where, and how to trade.
These are not just ordinary algorithms; they are highly
sophisticated programs capable of making complex trading
decisions based on multifarious market data inputs. They
can analyze news feeds, market data, and economic
indicators in real time, making decisions on a scale and
speed impossible for human traders. The algorithms are
designed for precision, seeking out patterns and signals
within vast datasets to execute trades with razor-sharp
accuracy.

The infrastructure supporting HFT operations is as critical as

the algorithms themselves. This infrastructure encompasses
the hardware and software, the data centers, and the
network connectivity that links HFT firms to the markets. At
the heart of this infrastructure is the need for ultra-low
latency, a term that refers to the minimal delay in
transmitting data and executing trades.

1. Hardware and Software Engineering: Custom-built, high-

performance servers equipped with powerful processors are
deployed to handle complex calculations and data analysis
at lightning speeds. Firms continually push the limits of
technology, developing proprietary software that can
process information and execute trades faster than off-the-
shelf solutions.

2. Data Centers and Co-Location: HFT firms often place their

servers in the same data centers as those used by stock
exchanges (a practice known as co-location) to minimize the
data transmission time between the HFT system and the
exchange. This proximity is crucial for reducing latency and
is a testament to the lengths to which firms will go to shave
milliseconds off their transaction times.
3. Network Connectivity: The networks connecting HFT
servers to exchanges are designed for speed. High-quality,
dedicated fiber-optic cables ensure the fastest possible data
transmission speeds. Additionally, firms constantly seek the
most direct physical routes for their cables, as even the
length of the cable can affect speed.

Balancing the Triangle: Speed, Algorithms, and

Infrastructure

The interplay between speed, algorithms, and infrastructure

in HFT creates a delicate balance. Each component relies on
the others; speed is useless without the algorithms to make
intelligent trading decisions, and both are ineffective
without the infrastructure to support them. This ecosystem
is continually evolving, with advancements in one area
spurring improvements in the others.

The dynamics of HFT are centered around the intricate

dance of speed, algorithms, and infrastructure. Together,
these elements form a complex yet efficient system capable
of navigating the volatile seas of the financial markets with
agility and precision. As technology advances, so too will the
capabilities of HFT, promising an ever-more fascinating
future for this high-stakes domain of finance.

Role in the Financial Markets

HFT enhances market liquidity, a fundamental aspect that

allows financial markets to operate smoothly. By
consistently offering to buy and sell securities, HFT firms
insert themselves as vital intermediaries in the trading
ecosystem. Their high-speed, high-volume trading
Another random document with
no related content on Scribd:
 APPENDIX
BOHR’S THEORY OF THE HYDROGEN
SPECTRUM
THE mathematics involved in this theory is so simple that only a
very slight acquaintance with elementary dynamics is required in
order to understand it.
Let us consider an electron revolving in a circle about the
nucleus. Let be the mass of the electron, a the radius of its orbit,
its angular velocity. Also let be the (negative) charge on the
electron and the (positive) charge on the nucleus.
Then according to elementary dynamics, the centrifugal force of
the electron in its orbit is

while the force attracting it to the nucleus is

by Coulomb’s Law. These two must be equal, so that

So far, we have been proceeding on traditional lines. But we come

now to the application of the quantum theory.
 The kinetic energy of the electron is ; the potential

energy is . In virtue of the above equation, is double

, so that the total energy is equal to the kinetic energy with

its sign changed. The impulse corresponding to is , and this
has to be taken round one complete circuit of the orbit. This yields
the value , which must be put equal to a multiple of , say
, where is an integer. Thus we have the equation

Now and and are known; thus (1) and (2) determine and
as soon as is fixed. We have

The smallest possible orbit is got by putting ; thus its radius is

, where

The next possible radius is

The kinetic energy in the orbit is

Since the total energy is the kinetic energy with its sign changed, the
loss of energy in passing from the to the orbit is

If this transition is to give rise to a wave of frequency , we must

have

by the principle of quanta. That is to say is given by the equation

If is the velocity of light, this gives a wave-number . Now the

empirical formula for the wave-numbers of the lines of the hydrogen
spectrum is

where is Rydberg’s constant. This shows that, if our theory is

right, we ought to have

By substituting the observed values for , , , and , it is found

that this equation is satisfied. This was perhaps the most sensational
evidence in favour of Bohr’s theory when it was first published.
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