High-Frequency Trading (HFT) is a trading method that works by automation. To do the transactions, superpower computers automatically trade in a fraction of a second by using a series of complex algorithms.
The popularity of High-Frequency Trading has been rising since the last decades. Accordingly, 60% to 70% of US trading performed through this method in 2009-2010 although the percentage arguably declines recently.
Speed is the main reason why traders conduct the method since a split of seconds produces a huge difference. Thanks to the analytical power of ICT, HFT traders can see the changing prices and spot the emerging trends that most traders cannot see.
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The Users of High-Frequency Trading
As a matter of fact, in order to use this trading method, traders should spend a massive amount of cash on equipment. At first, a superpower computer, a co-location server, and a matching engine are necessary. Among all the benefits, the above-mentioned equipment can decrease latency, which equals faster speed.
Since the price is ridiculously costly, most HFT traders are investment banks, institutional investors, and hedge funds. By anticipating and beating the trends, traders are highly possible to earn returns on trades they make by virtue of their bid-ask spread, leading to significant profits.
The Benefits of Using the Method
The very first benefit is that it improves the market’s liquidity. Accordingly, this is understandable since the utilization of HFT started when exchanges offered incentives for companies to increase liquidity.
Another benefit is that it significantly increases bid-ask spreads–the difference between the quotes prices for an immediate sale and an immediate purchase for stocks, futures contracts, options, or currency pairs. A study reported that the Canadian government once introduced fees on HFT and the bid-ask spreads increased by 9%.
Critiques Surrounding HFT
Since automated-computers run the transactions, many critics have blamed HFT for being unfair. Accordingly, many argue that HFT allows corporate and investment banks to profit at the expense of small traders.
Despite numerous arguments and controversies, HFT is still considered legal because it has not yet to be proven otherwise.
Also Read: Applying Momentum Indicators in Your Trading Strategy
