High-frequency trading
High Frequency Trading (HFT) is an automated trading platform used by large investment banks, hedge funds and institutional investors. It uses powerful computers to trade a large number of orders at extremely fast speeds.
These high frequency trading platforms allow traders to execute millions of orders and scan multiple markets and transactions within seconds, giving institutions using the platforms an edge in the open market.
The systems use complex algorithms to analyze the markets and are able to spot emerging trends in a fraction of a second. By being able to recognize changes in the market, trading systems send hundreds of baskets of stocks in the market to Bidask, which is beneficial for traders.
MAIN TAKE AWAYS
high Frequency Trading is an automated trading platform that large institutions use to trade large numbers of orders at high speed. HFT systems use algorithms to analyze markets and spot emerging trends in a fraction of a second.
Critics see high-frequency trading as an unfair advantage for large companies over small investors.
Essentially, by anticipating and beating market trends, institutions that implement high-frequency trading can achieve favourable returns on the trades they make due to their bid-ask spread, which translates into profits important.
Understanding High-Frequency Trading
The Securities and Exchange Commission (SEC) does not have a formal definition of HFT but gives it some characteristics:
Use of extraordinarily fast and sophisticated programs for generation, routing and delivery ” order execution
Use of colocation services and individual data flows offered by exchanges and others to minimize networks and other latencies Very short time frames for establishing and liquidating positions
Submission of numerous orders which are cancelled shortly after ‘enter
Close on the trading day as close to a flat position as possible (i.e. do not hold large uncovered positions overnight)
High-frequency trading has become commonplace in the markets following the introduction of incentives offered by stock exchanges to institutions to add liquidity to the markets.
By offering small incentives to these market makers, exchanges gain additional liquidity, and institutions that provide liquidity also make larger profits on each trade they make, in addition to their favourable spreads.
Although spreads and incentives are only a fraction of a cent per trade, multiplying them by a large number of trades per day equates to huge profits for high-frequency traders.
Critics see high-frequency trading as unethical and an unfair advantage for large companies over small institutions and investors. The stock markets are supposed to offer a level playing field, which HFT likely disrupts as the technology can be used for very short-term strategies.
High-frequency traders make their money on any imbalance between supply and demand, using arbitrage and speed to their advantage. Their operations are not based on fundamental research on the company or its growth prospects, but on strike opportunities.
Although HFT is not intended for anyone in particular, it can cause collateral damage to retail investors as well as institutional investors such as mutual funds that buy and sell wholesale.
