High-Frequency Trading (HFT)
Strategy
High-Frequency Trading
High-Frequency Trading is a subset of algo-trading. Its major characteristics are high speed, a huge turnover rate, co-location, and high order-to-order ratios. It operates by using complex algorithms and sophisticated technological tools to trade securities.
Benefits
Benefits of High-Frequency Trading
Large wins on small price changes
It helps traders earn significant profits even from minor price fluctuations. With these tools, financial institutions can attain significant bid-ask spread returns.
Expanded opportunities
Since algorithms are able to scan multiple markets and stock exchanges, traders are able to discover more opportunities. For example, arbitraging the same asset with minor price differences on two separate exchanges.
Higher Market Liquidity
By increasing competition on the market due to larger volumes and speed of execution, high-frequency trading makes markets more price-efficient. Consequently, market risk declines since there’s always someone to buy what you’re selling and vice versa.
HFT
High-Frequency Trading Strategies
High-frequency trading is a very complex process which is why it’s usually only leveraged by large institutions like proprietary firms, investment banks, and hedge funds. These organizations rely on various money-earning strategies, some more controversial than others.
Strategies
High-Frequency Trading Strategies
it’s worth quickly mentioning the most popular ones:
- Market-making
- Liquidity provision
- Statistical arbitrage
- Price movement ignition