Gone are the days of calling brokers, paying them high fees for simple trades, and waiting a long time for execution. Today, automated systems handle the absolute majority of trades worldwide. According to some estimates, algorithmic trading, including high-frequency trading, accounts for more than half of all equity trading in the US.
High-frequency stock trading is one of the most significant phenomena in the world of trading. HFT systems make it possible to trade on the stock markets in fractions of seconds. Such solutions are driven by algorithms developed according to the strategies of market participants. This means fast decision-making, advanced trading strategies, and new opportunities for those who do not hesitate to adopt the new technology. According to a study by Grand View Research, the global high-frequency trading market will reach $501.0 million by 2028, with a CAGR of 3.5% between 2021 and 2028.
Want to develop your own high-frequency trading system? Then let’s explore the specifics of such systems and learn some comprehensive information about automated trading software development from HFT software engineers.
Peculiarities of High-frequency Trading (HFT)
An effective HFT system should be keeping with the following criteria:
✔️ A rapid exchange of capital – for traders, even a few microseconds count.
✔️ A large number of transactions – a lot of transactions are realized during the same day of execution.
✔️ Low profit per transaction – with the help of the Particle Swarm Optimization algorithm the system focuses on following the best possible strategy with guaranteed profit.
✔️ Financial instrument positions neither accumulated from one trading day to another nor avoided – the trading system can automatically enter buy/sell orders and maintain the positions from one day to the next.
✔️ Trading through a computer system – algorithms execute the decision-making process and investment strategies rely on data from statistics, economics, and AI.
High-Frequency Trading Strategies
HFT traders use various strategies to make money. Market participants take advantage of Big Data by using fast software with optimized connectivity and smart algorithms. In this context, HFT strategies are characterized by short-lived tactics, strict risk management, the use of public information, and sophisticated technologies. Let’s explore the key strategies for developing a high-frequency trading platform.
? Market making
A number of market-making strategies aim to exploit the bid-ask spread by placing limit orders. In this case, the return is the difference between bids and offers. When market makers are selected for the next trading round, they can replace the executed limit orders, one or both at a time, with the new orders at the best available prices.
In the literature, we find two types of market-making models – inventory-based and information-based. Inventory models deal with the effective management of inventories – when and what orders of assets should be placed, what are the constraints on time, money, production, and storage capabilities, etc. The second group of market-making models focuses on extracting information that other market participants have by analyzing buying and selling flows and the order book.
Arbitrage is another popular set of HFT strategies based on predicting price differences between the same assets across different exchanges. For example, arbitrageurs exploit market inefficiencies – the price differences between a bond, the rates of a foreign currency, and futures contracts on that currency.
? Structural strategies
Structural strategies aim at exploiting structural weaknesses of the market or weaknesses of certain market participants. If some traders have access to more sources of information, they can exploit this and trade executions at outdated prices on trading venues.
Latency arbitrage and flash orders are examples of structural strategies. The first refers to the delay between the instructions you give and the time period for their execution. Flash orders mean that a trader has the opportunity to see large orders before they reach the general marketplace.
? Directional strategies
Directional or momentum trading is about building a position to follow the price momentum and bet on whether the price will move up or down.
Directional strategies include news-based trading, where the trading software analyzes information from news sources, liquidity detection, and momentum trading, where traders anticipate short-term market directions by detecting market participants’ order flow or new information.
Development Scope of High-Frequency Stock Trading (HFT) System
Trading platform software development involves a lot of work and investment. Let’s explore the core functionality of an HFT system and the amount of work involved.
The authentication part implies enabling users to sign in and out of the system using certain credentials.
2. Trading screen
Working on the trading screen includes trading window management and making a calibrator for users to set the parameters for trading sequences and positions.
- Trading window management
When managing a trading window, the user must be able to select an index, the number of orders, and a currency.
A calibrator is a cornerstone on a trading screen. It includes several calibration panels and gives the users the opportunity to calibrate buy or sell limits/hedge sequences, to open positions by using sets of parameters.
- Max loss order
Max loss order is an always-active function that helps to limit losses and protect profits. When a max loss order is triggered, a trading platform turns off.
- Account overview
An account overview displays the user’s balance, day trade results, last trade results, and a service fee.
- Open positions
Open positions should display the difference between long and short open positions so that the user can view and consolidate them into a single open position, and get the positions organized in chronological order.
- Netting positions
The feature of netting positions allows users to offset multiple financial obligations in order to compensate for losses in some positions with gains in other ones.
- Daily turnover
With the help of the daily turnover element, users can see the total trading volume for the day.
- Order book
An order book allows the user to view an organized list of orders and carry out the main manipulations: to open, close, cancel, consolidate, view orders, and select indexes.
- Trade log
The user gets an opportunity to observe the trade log, a transaction history. The information covers the assets and directions, the number of contracts, types, prices, and time.
The user should be able to create and manage an account on the platform. Trading platform accounts are linked to brokerage accounts. The users’ accounts should be protected from unauthorized access. To enhance security, users undergo a KYC identification process that includes such steps as face and document verification.
The trading feature means that the user can get the market data and place, cancel, or remove orders.
5. Algorithm implementation
Implementing a working algorithm, the project team creates and activates sequence orders, selects their number, and activates them either at market’s best price at the moment or as a limit order. Then the step between the orders needs to be set, as well as protective orders, and the activated position/order in the sequences should be closed manually, without canceling the whole sequence. A hedge function should also be activated and used considering the results of the sequence orders. The user can test the algorithm when the broker can provide historical data.
On average, it takes about 4 months to implement such a project. The duration depends on the team size, structure, and workload. The scope implying authentication, еrading screen works, account, and trading with UI design would cost about 45.000$. To complete the work on algorithm implementation and backtesting, the customer should have an additional budget of 15.000$.
Where to Start to Build an HFT System?
The work on building a credible HFT system begins with selecting the right contractor. Let’s establish the key selection criteria.
✅ Domain experience
When selecting potential candidates to hire HFT developers, pay attention to their portfolios and specifications. A company that is supposed to provide high-frequency trading software engineers for a project must have relevant experience to translate your requirements into a competitive product.
Your trading system must have an impeccable reputation if you want traders to trust you with their money. Therefore, you should choose a contractor with a good reputation and positive reviews.
✅ Discovery phase as a service
Conducting a discovery phase is necessary to thoroughly research the project, specify requirements, and carefully plan further work. When a contractor provides the discovery service, you are most likely to get the best possible solution analysis and a dedicated team that understands your idea and is determined to implement it.
✅ Post-development support and maintenance
Developing the desired solution is only half the battle. The other half is the further support and maintenance of the system. Therefore, you should find out in advance about the vendor’s terms for post-development support.
When it comes to the cost of HFT system development, you should understand that work on such a scale cannot be cheap. Apart from the number of features to be delivered, the process requires high quality of the whole solution and its further support. However, we do not encourage you to overpay for world-known names that do not necessarily guarantee high quality. Try to find the right balance between cost savings and ensuring high standards.
Algo Trading System Development – Itexus Expertise
Itexus has a proven track record in the fintech domain. Financial management companies choose us as a development partner for a comprehensive approach and experience with high-load real-time applications. We are proud to share a few of these projects with you.
Algorithmic Intraday Stock Trading System
For a wealth management company with 20 years of experience and its own active stock trading strategy, we developed an algorithmic stock trading system that automates trading strategy and operations. The system enables its users to make lightning-fast trading decisions that pay off with the help of AI-based prediction modules and automated operations. To ensure this, the system uses complex analytics, opens and closes positions according to the strategy, and monitors activity in real time. With the new solution, our client has been able to reduce operating costs by cutting staff and scale the business, giving thousands of end customers access to smart trading. For more details on this project, see the case study.
Stock Trading Bot
We developed a stock trading bot for an investment company that specializes in active stock trading. It is a cloud-based application that connects to a brokerage account via an API. The bot automates stock trading by executing trades based on predefined requirements. The bot tracks stocks throughout the day, looking for indications as to when it should buy, and executes the trade once the preset buy parameters are met. Conversely, the bot executes a sell order once all sell parameters are met. For more details on this project, see the case study.
Automated Stock Trading Platform
An investment management company providing services to both individual and institutional investors entrusted us with automated stock trading software development. We delivered an algorithmic trading system based on a complex, multi-level analysis of prices and the behavior of their derived characteristics. The system allows the administrator to set up trading strategies with different market instruments and backtest them with data from different financial markets and time frames. More details about this project can be found in the case study.
Electronic trading platform development is a lengthy process that requires significant client resources and the involvement of a world-class team of software engineers with deep expertise in HFT. If you are determined to hire such a team, you can count on our HFT developers, software architects, UI/UX designers, financial experts and DevOps engineers with solid experience in the FinTech domain. Contact us to turn your HFT concept into a powerful solution.
By Itexus Team