High-Frequency Stock Trading (HFT) Systems Development

Gone are the days when people used to call brokers, pay them huge fees to make simple trades, and wait long for the execution. Now we let automated systems perform the absolute majority of the trades worldwide, which has become a game-changer.

High-Frequency Stock Trading is one of the most significant phenomena in the trading world. HFT systems allow operating in stock markets in fractions of a second and are guided by the algorithms developed following the market players’ strategies. This means quick decision-making, advanced trading strategies, and new opportunities for those who will not hesitate to adopt the new technology.

The world HFT market reached USD 387.9 million in 2020 and is projected to register a CAGR of 3.5% from 2021 to 2028. In this context, we would like to consider the peculiarities of the growing technology that is getting more affordable for traders and provide you with comprehensive information on automated trading software development from HFT software engineers.

Peculiarities of High-frequency Trading (HFT)

An effective HFT system fulfills the following conditions:

• A rapid exchange of capital — even a few microseconds count for traders;
• A large number of transactions — a lot of transactions are realized during the same day of execution;
• A low gain per transaction obtained — 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 — a 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 the data from the fields of statistics, economics, and AI.

High-Frequency Trading Strategies

The HFT traders operate through various strategies to make money. The market participants benefit from big data by using fast software with streamlined connectivity and smart algorithms. In this connection, HFT strategies are characterized by short-lived tactics, strict risk management, using public information, and sophisticated technologies. Let’s explore the key approaches that are possible through trading platform development.

Market making

A set of market-making strategies is aimed at capturing the bid-ask spread by posting limit orders. In this case, the income is a result of the difference between bids and offers. When market makers are chosen to trade for the next round, they can replace the executed limit orders, one or both at the same time, with the new ones at the best available quotes.

In literature, we can meet two types of market-making models — inventory and information-based ones. Inventory models deal with effective inventory management — when and what orders for assets are to be placed, what kind of restrictions on time, money, production, and storage facilities exist. The second group of market-making models is focused on extracting information possessed by other market players by analyzing buying and selling flow and the order book.

Arbitrage

Arbitrage is another popular set of HFT strategies that are based on predicting the differences between the prices of the same assets across different exchanges. For example, arbitrageurs take advantage of market inefficiencies — the differences in prices between a bond, prices of a foreign currency, and futures contracts on the currency.

Structural strategies

Structural Strategies are focused on taking advantage of structural market vulnerabilities or weak points of certain market players. If some traders have access to more information sources, they can exploit it and trade in the venues with executions at stale prices.

Latency arbitrage and flash orders are examples of structural strategies. The first one refers to the delay between the instructions you leave and the period for their execution. Flash orders mean a trader has an opportunity to view large orders before they reach the general marketplace.

Directional strategies

Directional or momentum trading involves establishing a position to chase the price momentum and anticipating whether it will move up or down.

Directional strategies comprise news-based trading when trading software analyzes information from news sources, liquidity detection, and momentum trading when traders anticipate short-term market directions by detecting market players’ order flow or new information.

Development Scope of High-frequency Stock Trading (HFT) System

Trading software development implies extensive work and investments. Let’s explore the scope of HFT developers’ work.

The authentication part implies enabling users to sign in and out of the system using certain credentials.

Working on the trading screen includes trading window management and making a calibrator for users to set the parameters for trading sequences and positions.

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 opportunities to calibrate buy or sell limits/hedge sequences, to open positions by using sets of parameters.

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.

An account overview displays the user’s balance, day trade results, last trade results, and a service fee.

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.

The feature of netting positions allows users to offset multiple financial obligations in order to compensate losses in some positions with gains in other ones.

With the help of the daily turnover element, users can see the total trading volume for the day.

An order book allows the user to view an organized list of orders and carry out the main manipulations: to open, to close, to cancel, to consolidate, to view orders, and to select indexes.

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.

Implementing a working algorithm, the project team creates and activates sequence orders, selects their number, and activates them either at market 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 starts with choosing the right contractor. Let’s determine the most significant selection criteria.

Domain experience

When considering potential candidates, 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 turn your requirements into a competitive product.

Reputation

Your trading system must have an immaculate reputation so that traders could trust you with their money. Therefore, you should choose a contractor with a high reputation and positive reviews.

Discovery phase

Running a discovery phase is necessary to do deep research on the project, specify the requirements, and carefully plan further works. If a contractor takes into account the discovery phase, 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

Getting the desired solution developed is only half the battle. The other half is the further support and maintenance of the system. That’s why you should understand in advance the vendor’s conditions for post-development support.

Rates

When you pay for your future HFT system, you should understand that the work of such scope can be not cheap. Apart from the number of features to be delivered, the process implies 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 one of such projects with you.

Our project, an algorithmic stock trading system, allows its users to make lightning-fast trading decisions that pay off with the help of AI-based predictive modules and automated operations. To ensure that, the system uses complex analysis, opens and closes the positions according to the strategy, and monitors real-time activities.

With the new system, our client reduced operational costs due to the personnel reduction and scaled the business so that thousands of end-clients can get access to smart trading.

Summary

Electronic trading platform development is a laborious process that requires substantial customer resources and the involvement of a first-class software engineers’ team with in-depth HFT domain expertise. If you are determined to hire HFT developers you can count on our 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.

Originally published on Itexus Blog on July 20, 2021.