how high frequency trading system connects to exchange

Question

I'm trying to study about high frequency trading systems. Whats the mechanism that HFT use to connect with the exchange and whats the procedure (does it has to go through a broker or is it direct access, if it's direct access what sort of connection information that i require)

Thanks in advance for your answers.

Answer 1

Understand that there are two different "connections" in an HFT engine. The first is the connection to a market data source. The second is to a clearing resource. As mentioned in kpavlov's answer, a very expensive COLO (co-location) is needed to get as close to the data source/target as possible. Depending on their nominal latency these COLO resources cost thousands of dollars per month.

With both connections, your trading engine must be certified by the provider (ICE, CME, etc) to comply with their requirements. With CME the certification process is automated, with ICE it employs human review. In any case, the certification requires that your software demonstrate conformance to standards and freedom from undesirable network side effects.

You must also subscribe to your data source(s) and clearing service, neither is inexpensive and pricing varies over a pretty wide range. During the subscription process you'll gain access to the service providers technical data specification(s)-- a critical part of designing your trading engine. Using old data that you find on the Internet for design purposes is a recipe for problems later. Subscription also gets you access to the provider(s) test sites. It is on these test sites that you test and debug your engine.

After you think you engine is ready for deployment you begin connecting to the data/clearing production servers. This connection will get you into a place of shadows-- port roulette. Not every port at the provider's network edge has the same latency. Here you'll learn that you can have the shortest latency yet seldom have orders filled first. Traditional load balancing does little to help this and CME has begun deployment of FPGA-based systems to ensure correct temporal sequencing of inbound orders, but it's still early in its deployment process.

Once you're running you then get to learn that mistakes can be very expensive. If you place an order prior to a market pre-open event the order is automatically rejected. Do it too often and the clearing provider will charge you a very stiff penalty. Other things can also get you penalized or even kicked-off the service if your systems are determined to be implementing strategies to block others from access, etc.

All the major exchanges web sites have links to public data and educational resources to help decide if HFT is "for you" and how to go about it.

Answer 2

It usually requires an approval from exchange to grant access from outside. They protect their servers by firewalls so your server/network need to be authorized to access. Special certification procedure with technician (by phone) is usually required before they authorize you.

Most liquidity providers use FIX protocol or custom APIs. You may consider starting implementing your connector with QuickFix, but it may become a bottleneck later, when your traffic will grow.

Information you need to access by FIX is:

1. Server IP
2. Server port
3. FIX protocol credentials:
   1. SenderCompID
   2. TargetCompID
   3. Username
   4. Password
   5. Other fields