The magic of the black box
In HFT, the black box is a synonym for auto-
mated trading or algorithmic trading. In other
words, the computer runs the trading program.
In its most simple form, the black box is the
program into which data is first entered, after
which the program gives an instruction to
buy, sell, hold or not to enter an order. When it
instructs to buy or sell, it also instructs at what
price and also what type of order type it gives
to the market. The black boxes of trading firms
are closely guarded secrets theyre what HFT
firms make their money with.
Technology is making it easier for inves-
tors to gain access to black boxes, which in
essence means building your own working
trading models. To get started, what you need
is a trading idea or system. You should have
back-tested your trading idea against previ-
ous market movements to see whether your
trading strategy has the possibility of making a
profit in a real trading environment. The trad-
ing idea needs to be turned into computer code
that takes in data, analyses it and then gives
an order. If youre not capable of coding, find
someone who can to put your trading system
into a working black box form.
Several languages are used for algorithmic pro-
gramming, and one black box may use different
languages for different parts of the strategy.
One language can be used to analyse the data
and to come up with the output needed. In the
case of trading, this output would be the order
that is sent to the market. Then a different lan-
guage is needed to actually send the order to
the market based on what language the trading
venue in question uses.
The most common languages for the black box
are C#, C++ and Java, although plenty of other
languages are also used. (If you want to get to
grips with any of these languages, check out
the corresponding books in the For Dummies
series by visiting www.dummies.com.) The
black box is of little use to you if its not fast.
In todays markets, opportunities may well be
gone if the action from trading opportunity to
execution is too slow.
Different languages are used in sending an
order to the market. Increasingly, one language
has become the most common for communi-
cation between different market participants
including the exchanges, the buy-side and the
sell-side. This language is the FIX algorithmic
trading definition language known as FIXatdl.
It relies on the FIX protocol, which is a system
that allows financial firms and exchanges to
communicate with each other in real time. The
FIXatdl gives all the necessary output from the
black box to the trading venue to place an order
in the markets.