Tuesday, April 14, 2015

Is OmiCronFX a High Frequency Trader (HFT)? | Yes, in the best possible way

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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