EP02 - HFT Trading

How high-frequency trading works. Learn about latency arbitrage, order book dynamics, FPGAs, colocation, and how HFT firms profit from microsecond speed advantages in markets.

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I figured it out, Kurumi! HFTs and quants are just **Super-Fintech**.

Visa processes 5,000 transactions a second. HFTs process 50,000. It's just a faster checkout lane!

Visa moves money from your pocket to Starbucks.

HFTs don't move money. They hunt for **Ghosts**.

Ghosts?

Information Ghosts.

When Apple stock drops in New Jersey, it takes **1.5 milliseconds** for that news to reach Chicago.

For 1.5 milliseconds, the price in Chicago is wrong. It is a ghost of the past.

HFTs aren't bankers. They are **Time Travelers** exploiting that lag.

Hey! Store B is ripping people off! It's a penny more expensive!

It's not a ripoff. Store B just hasn't received the memo that the price dropped to $1.00 yet.

Look at that Turtle. He is about to buy at $1.01.

The bot made half a penny? That's it?

Half a penny, 50 million times a day.

That is **Latency Arbitrage**.

But why don't we just use this? Why does the price have to change so fast?

Why can't we just check the price once a day? Like normal people?

Because the world doesn't stop, Shez.

A factory explodes in Taiwan. A CEO tweets in New York.

The value of a company changes *instantly*.

The HFTs ensure the **Law of One Price**.

They force the price in Tokyo to match the price in London. They are the immune system attacking inefficiency.

Okay, so they keep prices synced. But isn't it just gambling?

They are betting on which car is faster!

Gambling implies risk.

If I know the price *is* $1.00 in New Jersey, and I know it *is* $1.01 in Chicago...

And I am faster than light...

There is **Zero Risk**.

It is free money lying on the floor. The only cost is the shoes you need to run fast enough to pick it up.

How fast do I need to run?

Faster than fiber optics.

Light travels 30% slower in glass (Fiber) than in air.

So HFT firms build microwave towers to shoot data *through the air* to beat the fiber cables.

They built a private internet just to save... how much time?

About **4 milliseconds** between Chicago and NY.

4 milliseconds?! A blink is 300 milliseconds!

In 4 milliseconds, an HFT algorithm can trade 10,000 times.

To them, a human blink is an eternity. It's the Ice Age.

Ah! This car has no chance!

How is that fair? The normal guy can't compete!

The normal guy shouldn't be racing F1 cars in a Honda Civic.

Actually, the normal guy wins too.

How? He got dusted!

Before HFTs, you paid a broker $20 to trade, and the spread was $0.10.

Now, because HFTs compete so fiercely to undercut each other...

The spread is $0.01. Trading is almost free.

So... they are fighting each other over crumbs, and we get cheaper bread?

Exactly. HFT is a **Race to the Bottom**.

But the cost of entry is insane.

You need **FPGAs**. You need to code in Hardware, not Software. Python is too slow. C++ is too slow.

You don't write instructions for a CPU. You rewire the chip itself.

If your code has an `if` statement, you lose. Branch prediction takes too long.

That sounds stressful.

It's an arms race where the winner gets a microsecond edge, and the loser goes bankrupt.

I think I'll stick to Visa. 5,000 transactions a second is plenty for me.

Good. Because in the HFT world, you aren't the customer.

You are the **Signal**.

The signal?

When you buy Apple stock, you create a ripple.

The HFTs see that ripple, surf it, and crash it into the shore before you even know you made a splash.

I just wanted to buy a coffee stock!

Then buy it and hold it.

But don't try to race the light. You have mass. They don't.