I am glad you are here to learn about high-frequency trading. However, I would love you to pay attention to the details here.
A friend of mine who was new and completely naive about the foreign exchange market once told me about intentions of going into high-frequency trading.
I made jest of him and I referred him to forex dominant to read and understand the basics of foreign exchange first before he starts retail trading not to talk of going into high-frequency trading.
You want to know why I made jest of him and why I advised him to visit forex dominant first? Lol!
Let me advise you too. Make sure no one distracts you while reading this article so as to achieve maximum understanding.
Now, let me explain everything you need to know about HFT.
What is High-frequency Trading?
High-frequency trading, which is sometimes shortened as HFT, is a form of trading that involves the use of very fast and powerful computers that can receive orders and execute trades in a few seconds.
The dictionary defines high-frequency trading as a type of trading in which a large number of stocks are bought and sold at very high speeds.
These computers are capable of spotting new trends and making their users have higher winning rates over every other trader.
However, facts have it that the speed of these computers dropped to mini-second and even micro-second around 2010.
Furthermore, High-frequency trading does not require a broker. At the end of each trading day, these computers do not hold any position.
A typical example of where HFT is used is in Arbitrage, where the computer finds the small differences in prices on different brokers.
A Brief History of HFT.
History has it that high-frequency trading has been in existence for about nine decades.
Then, traders buy and sell in physical exchange locations with high-speed telegraph services.
Some facts will say that electronic trading started in 1983, while some will say that it started in 1992 or 1983.
The most important information is that high-frequency trading started when electronic trading started.
In addition, in 2013, Italy introduced a tax payment scheme on HFT.
Italy introduced the scheme just to make sure that financial transactions will play a major role in contributing to public finances.
This scheme was made to apply regardless of where a transaction takes place. The fee was just 0.02% on every trade that occur in 0.5 seconds.
Since then, other countries like Belgium, Finland, Ireland, Turkey, and so on have joined in launching tax payment schemes on HFT.
Advantages Of HFT.
The main advantage of HFT is that it helps in executing millions of trades in a few seconds.
Also, traders of HFT are able to detect new trends faster than the rest of the market with the help of powerful computers.
However, this HFT has disadvantages and has been criticized by some financial experts.
Disadvantages/Criticiques of HFT
HFT was rumored to be the cause of the brief market crash on the 6th of May, 2010.
Although, after several investigations by the US Securities and Exchange Commission(SEC) and the Commodity Futures Trading Commission(CFTC), this rumor was confirmed.
One of the big disadvantages of HFT is the fact it is a huge contributor to market volatility. It affects other markets that are not forex based such as the stock market.
Also, high-frequency trading is like a form of proprietory trading with a low-risk control.
This type of trading favors traders with faster execution speeds.
One of the critiques of this HFT is Michael Spencer, a Nobel prize winner in Economics.
He believes that regulatory bodies should place a ban on HFT.
In one of his articles in 2016, he said, “So, I look into the future and I can say with confidence that as the era of the universal bank comes to an end, the single biggest catalyst for change in trading will be technology”.
He continued by saying, “Technology will bring us a new breed of trader, and those trading firms who embrace this change will end up looking more silicon valley than Wall street”.
In addition, the author of flash boys, Michael Lewis, also criticized this form of trading.
Michael Lewis said, “People no longer are responsible for what happens in the market because computers make all the decisions”.
Traders consider these criticisms as part of the disadvantages of HFT.
Lastly, the cost of getting those powerful computers is a big turn-off for anyone that cannot afford them. Unlike retail trading where all you need is a good internet connection and a personal computer.
What You Need Before You Can Start High-Frequency Trading.
To start high-frequency trading, a trader needs high-speed computers.
These big banks do HFT use these computers to execute trades and detect new trends faster.
Also, co-location with other banks is important so as to be able to access the market.
Real-time data feeds should be provided. These data feeds help in giving news and updates about market situations.
Lastly, a trader must build strong algorithms before he can start HFT.
High-frequency trading is a form of trading that involves the use of fast and powerful computers to execute orders.
These computers receive millions of orders and execute them in split seconds. In addition, this form of trading does not require the use of a broker. Big banks are the main users of HFT.
Now that you have read to this point, I believe you now understand what HFT is all about.
Also, do you now know why I made jest of my friend that day after he told me he wants to start HFT?
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