Using intelligent algorithms, a state-of-the-art infrastructure connected to exchanges and enormous computing capacities, high-frequency trading companies exploit tiny price differences in fractions of a second to gain an advantage over other market players and reap the profits. Transactions are made incredibly quickly: high-frequency traders have a 5-10 microsecond lead over other bidders when a trade is made and their profits are made on large volumes given the minimal margins that are taken. For a history in the US, Michael Lewis’ excellent and entertaining book, Flash Boys, is recommended.
In Switzerland, the SIX exchange offers a co-location service where external machines can be connected very close to the exchange’s computers. In the ZH1 computing center next to Zurich’s Hardbrücke, SIX allows high-frequency traders to use cables with equal distance between them to the exchange. This co-location service of the Swiss stock exchange is actively used. The list of participants includes KCG Europe, Virtu Financial and Flow Traders, Sun Trading, Citadel Securities, Spire Europe, Hardcastle Trading, Hudson River Trading and Timber Hill.
In China, the regulator recently sanctioned 42 of these firms, and 24 were banned from trading for three months, including Citadel Securities. The Swiss exchange knows the participants and their volume but does not know what exactly high frequency traders are doing in Switzerland: “We know the participants, but not their strategy. They are not obliged to disclose,” said Mr. Meier, spokesperson for SIX in an article in the Handelszeitung of January 16, 2016. The majority of strategies are based on time advantage. Among the best known and at the same time most controversial is electronic front-running. In this case, the programs identify large buyers in the market. In a few microseconds, high-frequency traders seize shares in demand on a wide variety of exchanges and then offer them to the initial potential buyers. The profit per share is not large, but it is replicated millions of times and captured with little risk.
So for the time being it seems that these discreet financial players, under the guise of useful market maker services, have been able to implement their strategies freely in Switzerland.