Overview
This lecture explains the architecture of high-frequency trading (HFT) systems, detailing how market data is processed and trades are executed at microsecond and nanosecond speeds.
What is High-Frequency Trading?
- HFT uses algorithms and machines to trade stocks and options at extremely high speeds.
- Systems execute thousands to millions of trades per second, faster than humans can react.
- The goal is to make tiny profits per trade, but accumulate large gains through massive volume.
- Speed is critical; a single millisecond delay can mean losing an opportunity.
Market Data Ingestion
- HFT systems receive market data via multicast feeds over ultra-low latency networks, often located near exchange servers.
- Specialized ultra-low latency network interface cards (NICs) and kernel bypass methods like DPDK allow microsecond-level data handling.
- Market data feed handlers decode and transform raw exchange data into an internal format at high message rates.
In-Memory Order Book Management
- The live order book containing all buy/sell orders is kept in memory to avoid disk or database latency.
- Replicated order books (A and B) ensure fault tolerance and instant failover capabilities.
- Order book updates trigger events in real time for strategy engines and routers.
Event-Driven Processing Pipeline
- Updates are published into a lock-free event queue to minimize contention and delay.
- Each market event is timestamped with nanosecond precision to maintain a precise event sequence and synchronize system components.
Hardware Acceleration with FPGAs
- FPGAs (Field Programmable Gate Arrays) run custom trading logic at hardware speeds, enabling sub-microsecond decision making.
- Some firms put all trading logic in FPGAs for ultimate speed, though this adds development complexity.
Software-Based Strategy Engines
- Most trading strategies run in software, rapidly evaluating the order book and making decisions.
- Engines adjust orders based on current market state, volatility, and risk, prioritizing speed and reliability.
- Strategies can be rule-based, statistical, or leverage simple machine learning models.
Smart Order Routing & Pre-Trade Risk Checks
- Smart order routers select the best exchange and order type for execution, optimizing for liquidity, latency, and fees.
- Pre-trade risk engines perform automated checks to prevent oversized or erroneous trades before submission.
Order Management & Real-Time Monitoring
- The order management system logs order status, execution times, and routes for tracking and auditing.
- Monitoring stacks capture latency, throughput, errors, and system health to ensure ongoing performance and compliance.
Key Terms & Definitions
- HFT (High-Frequency Trading) — Automated trading operating at microsecond or nanosecond speeds.
- Order Book — In-memory record of all current buy and sell orders in the market.
- NIC (Network Interface Card) — Hardware for network connections, optimized for low latency.
- FPGA (Field Programmable Gate Array) — Reconfigurable chip running ultra-fast hardware logic.
- Kernel Bypass — Network data processing that skips the OS kernel for reduced latency.
- Smart Order Router — Component deciding optimal venue and method for trade execution.
Action Items / Next Steps
- Review key architecture components (market data ingestion, order book, FPGAs, strategy engines).
- Prepare for deeper study on FPGA logic, trading strategies, or matching engines as suggested.