The other key ingredient to the success of any HFT platform is low network latency. The platforms are greatly helped in this regard by the fact that many exchanges will let HFT platforms pay to co-locate their servers with those of the exchange itself, so that the HFT platform can get its order in ahead of the competition. Critics contend that such co-location deals provide avenues for potential front-running of orders, in which an HFT platform gets an advance peek at an incoming order that will move a stock’s price in a specific direction, and then uses that knowledge to make a quick bet on impending the price move. [1]
That letters-of-fire was from the heavy computer gaming community, and even they are now clued into the critical place CoLo holds in this season’s hot new title — Matrix with Money 
UPDATE: Reuters’ Felix Salmon has wrestled the author of the above to the ground and conducted a must-read interview.[4]
FS: If HFT makes $20B a year, whose money is that?
JS: On one level, the answer to this question is easy for most of what goes on under the heading of “HFT”: the money is coming from whoever is buying stocks that are marked up a penny or so because they were down a rung on the speed/latency ladder. This could be pension funds, retail investors, or anyone else in the world. So it’s coming from the market participants.
And then there’s the anonymous Kid Dynamite,[2] the self proclaimed high-end card sharp who recently wrote a screed suggesting that us folk who are a bit less smart and colocated than the HFT traders deserve exactly what we’re getting. I spent almost an hour at the terminal last night swallowing down bile and nodding my head at the same time. Oh well, at least this guy [is that his real name?] [3] thinks that someone should strap on a six-gun, ride into Dodge and cool down the temperature at the OK Corral so that the retail investors can start considering sticking their heads out from their storm basements.
Meanwhile, I’m becoming a bit less worried about flash orders. Could it be that story’s a diversion? Just watch Larry Leibowitz, NYSE Euronext group executive VP in charge of U.S. Markets and Global Technology from about 3:30 in the embedded video. Look his eyes, and then his mouth. It’s the public inspecting their colocation practices [UPDATE: check out yesterday's "Upward Trend in Per-Cabinet Colo Revenue"] that has him worried. Fear’s a leading indicator. Maybe CoLo’s where we should be applying our curiosity.
——————–
[1]: "The Matrix, but with money: the world of high-speed trading", by Jon Stokes, Ars Technica, July 27, 2009.
Supercomputers pitted against one another in a high-stakes battle of attack and counterattack over a global network where predatory algorithms trawl the information stream, competing every millisecond to gain an informational advantage over rivals. It sounds like Hollywood fiction, but it’s just an average trading day on the stock market.
[2]: "We Fear What We Don’t Understand ", Kid Dynamite’s World, July 26, 2009.
I am a capitalist. I like competition in markets. Our competitive markets have resulted in evolution to the point where traders have written computer algorithms that do the job traders used to try to do by hand – profit from stock movements and from what they feel net supply and demand for a given stock is. This is the main reason I’m against most attacks on high frequency trading. SOMEONE will always be the best – the fastest – the closest – regardless of if you ban co-located servers, or install mandatory latency in order execution pipes. Would there be anything really wrong with making sure that all orders placed are valid for a 1/2 second or a full second? No, I don’t think there would be – and that might be the kind of compromise that we move toward – but we need to recognize that the playing field will never be level. It never has been level and it never will be level – there is always someone smarter than you, and it would be a shame to try to legislate that edge away.
[3]: "High Frequency Trading", by Ace Custodio, Examiner, July 28, 2009.
In the millisecond-to-millisecond shootout at Wall Street’s OK Corral, the fastest guns are firing bullets before the slower guns get out of their holsters. Those lightning fast triggers are reaping big profits, taking no hostages and cashing in before Johnny Law arrives to set things right. …
[4]: "Jon Stokes Interview: High frequency trading as a liquidity tax", by Felix Simon, Reuters, July 28, 2009.
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This whole thing just strengthens my view that the stock market is not doing what it was supposed to. I’ve always thought the idea was to be able to invest in a company, which sounds good on paper.. the company sells of ownership and gets money to grow with in return. Instead, you have CEOs driving companies into the ground in order to boost their stock-driven bonuses, investors rewarding long-term suicidal moves (you laid off 25% of your engineering force? nice, here’s a 10% stock price jump!), and the entire market as a whole seems like nothing more than a giant poker game, with the big players trying to manipulate the small players into driving specific stocks up and down.
I often wonder what would happen if we just eliminated the market.. but I suppose all the poker playing would just move to something else instead.
Linenoise,
It absolutely IS a diabolically twisted poker game with advantages not just for the house but also for selected “whales”. Addicts, half asleep game referees, crooked dealers, cheating players, system selling scam artists, bought and paid for sheriffs, and hustlers of all kinds keep it the exciting equivalent of the old wild west gambling saloon, but with fewer actual gun fights.