“The following is based on a brief analysis of publicly available documents and websites, and therefore may have material discrepancies with the actual implementations in a given HFT firm. The publicly available data does describe logical and reasonable architectures for HFT systems, however.

“The architecture of a "normal" server is built around the idea that the server processors do most of the work, and peripheral cards such as the networking cards provide a method to get data in/out of the server efficiently. HFT systems start with a normal server, and customize it to move the trading processing "closer" (time wise) to the network interface. The idea is to reduce the "latency" (time delay) to the smallest possible amount, allowing for ultra fast response to messages received from the network (such as fast quote requests).

“Many High Frequency Trader systems are built around the following:

• A solid, high performance server, typically using the Intel Xeon processors
• The Linux Operating System for ease of application-specific modifications
• Xilinx FPGA chips programmed with the algorithms invented/obtained by the HFT firm, usually installed on a custom ultra fast networking card
• Ultra fast networking cards (often with the FPGA's on board, to maximize the speed of the communications between the network and the FPGA)

“One example is HP DL380p Gen8 servers, Mellanox ConnectX®-3 EN 10 Gigabit Ethernet Adapters, and RHEL 6.x. RHEL is Red Hat Enterprise Linux (RHT on NYSE). Mellanox is a small company focused on ultra high speed networking cards (MLNX on Nasdaq). Hewlett Packard is the largest global supplier of Intel-based servers (HPQ on the NYSE). This is the configuration run by Redline Trading, with results released in this press/marketing blurb: .

“Using the Xilinx (industry leader, XLNX on Nasdaq) Field Programmable Gate Arrays (FPGA), the trading firm can implement its proprietary algorithms in hardware right on the networking card, thereby bypassing the considerable overhead of running actual software algorithms on the server. Think of this as each firm having the ability to build a custom hardware solution for their trading. The server is then used for logging the trades and keeping track of all the data associated with the trading being conducted by the specialized card/FPGA. If you go to http://highfrequencytraders. com/tag/xilinx-0 you will find numerous references to the Xilinx FPGA's.

“On the server side, the data is collected in a database, most likely a commercially available SQL database such as Sybase, DB2, or Oracle. The database server may be remote from the HFT trading system (serving multiple HFT platforms, for example).

“This separation of the trading processing and data collection/monitoring does introduce substantial challenges in monitoring the trading, as it would slow down the trading to try to introduce risk controls in the trading engine (network card plus FPGA). This would put the HFT firm at a disadvantage to its competitors. Therefore the risk management would likely be implemented in the server itself, implying that a significant number of trades could be executed before the risk management software detected an issue and ordered the trading engine to shut down.

“The cost of an entry-level programming tool for FPGA's is under $5k, by the way, and much of the hardware is off the shelf. The total capital cost of an HFT system is therefore quite low (a few hundred K per system max), though the cost of co-location with the exchange computers may be a serious monthly expense. An HFT firm may have multiple systems, of course. N.B. it is likely the co-location costs that are the primary cost driver for the IT side of HFT firms, not the hardware.

“An alternative architecture is to use the fastest available networking cards (no FPGA's) with the highest performance Xeon processors, and using many processors. This system would rely on the server to do the algorithmic work, which then facilitates making fast changes to algorithms and providing faster risk management response time. The processors would likely be overclocked, which gets more speed at the cost of more heat and the need to pretest the processors to sort out those with adequate tolerances for overclocking (gaming systems manufacturers employ this technique to build ultra fast systems).

“Generally, the http://highfrequencytraders. com site is excellent if you want to get really geekish on this subject :)

“While it would be theoretically possible to use supercomputers such as Cray or the IBM Sequoia BlueGene/Q for HFT, the cost of such systems is VERY prohibitive, the cost of the surrounding infrastructure to support these machines is VERY cost prohibitive, the cost of building customized networking cards with sufficient speed for these machines is VERY cost prohibitive (especially the non-recurring engineering costs), and it is still doubtful that these solutions could outperform the low cost solutions being employed in the industry today. ”

Eoin Treacy's view Thank you for this educative email contributed in the spirit of Empowerment Through Knowledge which helps to answer the questions posed in yesterday's Comment of the Day focusing on the potential beneficiaries of HFT.

Xilinx (2.61%) has been ranging below $40, albeit with a mild upward bias, since 2011. A sustained move below $30 would be required to question medium-term scope for continued higher to lateral ranging.

Red Hat has returned to test the upper side of the 2011 trading range near $50. It will need to find support in this region if the benefit of the doubt is to be given the benefit of the doubt.

Mellanox posted a downside weekly key reversal in September following an accelerated advance and pulled back sharply. It has since stabilised in the region of the 200-day MA but will need to hold above $70 if the benefit of the doubt is to be given to support building in this area.

Hewlett Packard has been trending lower for more than two years but is currently working on an upside weekly key reversal. While there is scope for a bounce from current levels, a sustained move above $18 will be required to break the progression of lower rally highs and to signal a return to demand dominance beyond the short term.

In conclusion even though HFT is a growth industry, the scale of the operations do not appear to be enough to have a material impact on the bottom lines of the above companies. Mellanox may be an exception. The most likely beneficiaries remain the exchanges through the fees they charge trading firms.


The Chart Seminar in 2012 - Our final venue for The Chart Seminar in 2012 will be in London in less than three weeks and I am greatly looking forward to meeting the delegates which, as of posting, come from 7 different counties. It will be held on November 22nd & 23rd at the Radisson Edwardian Hampshire on Leicester Square.

The full rate is £950 + VAT. (Please note US and Australian delegates, as non EU residents are not liable for VAT). Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.


Please note - David is away today b a ut will be back tomorrow.