The recent announcement of the
re-commencement of the Virtu
Financial NASDAQ flotation, which was suspended last year after
the publication of Michel Lewis’s book about the practice of High Frequency
Trading (HFT), entitled “Flash Boys”, raises the question of how close or how
far away the algorithmic trading that is carried out by OmiCronFX is to HFT.
Lewis highlighted the technological
side of the industry. Here, practitioners use the most powerful computers and
the fastest and closest connectivity to the trading servers to place themselves
in between the buyers and sellers of securities. Typically, when a large player
wishes to purchase stock or some other instrument, their order size is so large
that the transaction must be carried out in increments. The HFT trader can
anticipate the arrival of the later blocks of the order, pre-purchase them and
then offload them at a slightly higher price to the original prospective buyer,
often after only a matter of seconds have passed.
There are variations on the theme. For
example, some HFT operators will rapidly place hundreds if not thousands of
provisional trades, the great majority of which are subsequently cancelled, in
a bid to stimulate the market.
High
Frequency Trading in the best possible way
So, does OmiCronFX do any of these
things? The answer is no, even though OmiCronFX’s trading is done exclusively
by software (algorithms). These algorithms do two things: they (1) carry out
research on historical price data in order to determine the price action
patterns and trade timing that create the greatest probability of having
profitable trades, and they (2) place and manage live trades on a daily basis.
Of course the output of the trading is analysed, carefully, to ensure that the
most favourable price patterns continue in force, or that if they change the
software can be adjusted accordingly. The skills required for traditional
trading, for mathematical analysis and for computer coding all converge in the
OmiCronFX Mandelbrot algorithmic routine.
There is no manual trading done, and
no aspect of the strategies that are employed could be described as discretionary
trading.
The term High Frequency Trading
implies buying and selling often, and in this sense what the OmiCronFX software
does could be described as high frequency. For each currency pair being traded,
as many as seven trades per day could be entered into and completed (although
that would signify a high short-term volatility day. Two or three trades per
day would be typical). OmiCronFX normally ends each day with no exposure to
open trades.
Right now OmiCronFX only trades currencies,
but the principles involved are equally applicable to equities, commodities and
indexes.
Apart from historical analysis, identifying
trade opportunities, entering and managing them, the software has been very
carefully developed to incorporate the very best risk management techniques. Many
of these are of the-tried-and-tested variety - they have been proven over many
years by established professional traders - but they have also been added to
extensively from our own direct experience, taking into account certain
features of algorithmic trading that simply were not available to the
old-timers. We were not interested at all in making profits at that stage of
development, only in reducing the risk of loss to the greatest possible extent.
Now that the OmiCronFX Mandelbrot
algorithmic routine is profitable, that risk control aspect of it provides
excellent peace of mind as we proceed with our trading.
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