Inside the Black Box: The Simple Truth About Quantitative Trading

7.3. TRADING INFRASTRUCTURE

We have already mentioned that to execute and process electronic trades, connectivity needs to be set up between the trader on one end and the exchange on the other. Furthermore, a protocol for messages between these two parties is required. The hardware and software quants utilize in implementing their trading strategies are the final pieces of infrastructure. As in most things, quants face a choice between building or buying infrastructure in all three of these areas. Due to regulatory and other constraints, most traders utilize the services of independent brokerage firms that act as the trading agents for their strategies. One of the benefits of using a broker is that the infrastructure requirements are handled by that broker, and this infrastructure can be costly to replicate.

The most common type of exchange connectivity offered to a trader is, as already discussed, DMA access. This involves using the broker's servers and routing orders through them to the various pools of liquidity being traded. However, some quants, especially those engaged in high-frequency strategies, utilize a more recently available form of connectivity called colocation or sponsored access. Brokers offer easy access to markets through DMA platforms, but they add a fair amount of latency to the process. Quant strategies that are sensitive to this latency utilize the colocation option as a way of improving their executions. In a colocation setup, the trader attempts to place ...