From the June 2014 issue of Futures Magazine • Subscribe!

The history of HFT

High-frequency trading (HFT) is capturing headlines, but this concept is nothing new. Everything is relative, and what’s an intraday swing-trading approach today might have been considered the epitome of trading speed in the 1950s. But while perspectives change, one thing has remained constant. High-frequency trading systems are systemized to better take advantage of the fastest speeds a contemporary market allows.

The history of trading systems predates the general use of computers. Trading systems in the 1920s used chart books, hand drawn or purchased, and/or manual calculations. Charts and data services had their own methods for expediting delivery. Some weekly books were mailed on Thursday, with Friday’s data delivered over the weekend. Others were printed on location at the exchanges, where they could be picked up on Friday evenings. This was the Pony Express version of a logistical edge in the early 20th century.

Traders would run these systems manually using graph paper to make their own charts and ledger paper to lay out the rules. Testing these systems was enormously labor intensive. Another tool was to draw charts on glass. These glass-drawn charts would be laid on top of current market action in an effort to find analog years. 

Interestingly, many early systems were not all simple systems, such as moving averages. Many were complex pattern-based systems. An example is the Dunnigan One-Way Thrust Method, which systematically identified patterns relating to tops and bottoms within the market. It offered 100% objective rules to identify patterns, which would be used to place buy and sell orders. It came before computers and was done by hand. This system, which sold for $2,000 in 1955 (almost $18,000 in today’s money) was detailed in the November 1998 issue of Futures.

Early systems were complex and not easy to update over time. In fact, much of the work of the 1970s was simplifying many of these systems and their rules to make it easier to follow and track. This simplification also made it easier to use a calculator and, in the future, computers to program these systems.

One of the two most famous systems to evolve from this process was the Turtle System, which gained prominence in the mid-1980s. The system itself was nothing fundamentally new. It was based on a very old system that predated computers: Donchian’s Four-Week Rule. The Turtle System used 20-day and 50-day breakouts with various filters to manage risk and let profits run.

Another early prominent system was Larry Williams’ Volatility Breakout System, which was released in 1982. This was one of the most successful systems for many years. 

The idea of this system was to buy some expansion of the current range, or the last few days’ average of the range added to the opening, close or some other value. Williams originally sold this system for $3,000. It was at the heart of his famous winning streak in a public trading contest in 1987 when he turned $10,000 into more than $1.1 million.

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