What is High-Frequency Trading (HFT)?


High-frequency trading – HFT is a term used in talks that involve cryptocurrency exchanges and trading on them. It is a program trading platform where the speed of procedure is the beginning, the core, and the end of the transaction.

July 15, 2019, | AtoZ Markets - The program uses high-powered computers to process a large number of orders in nanoseconds. It depends on complex algorithms to analyze multiple markets and execute orders based on market conditions.

This means the faster the execution speed is, the more profitable it is.

Studies and experiments show that the HFT system has improved market liquidity and removed bid-ask spreads that previously would have been too small. This was proven by adding fees on HFT, and as a result, bid-ask spreads increased.

The system spread when exchanges started to offer incentives for companies to add liquidity to the market.

How does high-frequency trading make money?

High-frequency trading (HFT) is buying at a lower low price and selling when the price is above the trend.

This helps in reducing the price fluctuations. When they are successful, prices look like the blue line on the chart, with the blips are smaller and shorter-lived.

Investors earn from the spread between the price at which they buy (the “ask” price) and the price at which they sell (the “bid”). Here, we have a term called “the bid-ask spread.” That compensates the market makers for executing trades at precisely the time waned for trading.

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Volatility of stock price here plays in favor of the investor, meaning, the more the price volatile is, the broader the bid-ask spread is.

As for the tech part, placing trading servers physically close to exchanges’ matching engines will make a difference in the processing speed. And that is another factor HFT usually play on to make more significant profits.

As a practical example, we can look at the New York Stock Exchange (NYSE). It has a group of liquidity providers called Supplemental Liquidity Providers (SLPs).

The system mentioned above was introduced not long after the collapse of Lehman Brothers in 2008 when liquidity was a primary concern for investors.

SLPs attempt to add competition and liquidity for existing quotes on the exchange. As an incentive to companies, the NYSE pays a fee or rebate for providing said liquidity.

The average SLP rebate was $0.0019 for NYSE- and NYSE MKT-listed securities on NYSE in July 2016. It is benefiting of the millions of transactions done a day with large amounts of profits.

What do high-frequency traders do?

High-frequency traders try to play in the area of price movements caused by large institutional traders.
When a mutual fund sells one million shares of a stock, the price decreases. High-frequency traders exploit the moment and buy then. They hope to be able to sell the shares a few minutes later at the regular price.

When a pension fund buys two million shares, high-frequency traders short-sell the stock, in the hope of closing their position at a profit. (Short selling is the process of selling a stock you do not own. You borrow the shares from a stockbroker for selling them, and then later buy the stock to return the borrowed shares.)

Is high frequency trading legal?

There is no official regulatory text that declares high-frequency trading is illegal. As traders allow to practice it, then this means it is legal, in theory, for now for sure.

For delegalizing HFT, there should be legitimate reasons.

What percentage of trades are high frequency?

High-frequency trading accounted for 52 percent of May’s average daily trading volume of about 6.73 billion shares. It is as per estimates and records by the industry specialists over the web,

Crypto data in 2009 unveiled that high-frequency traders executed about 61 percent of 9.8 billion of average daily shares traded.

Should you try high-frequency trading on your own at all?

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