High-frequency trading or HFT for short is a method that relies on sophisticated algorithms. The main idea of this method is to ensure lightning-fast trade execution with multiple orders taking place simultaneously.
To achieve this, Forex traders apply cutting-edge technologies. Besides, high-frequency trading requires powerful hardware to execute orders in fractions of the moment. This is how high-frequency traders benefit from market movement.
In this article, we will discuss how the system works and if it is really worth applying. It will hardly fit all types of traders. Generally, HFT refers to more advanced and technically-educated market participants. Besides, the methodology comes with some crucial downsides that beginners should also take into account before diving deep into this particular approach.
So, let’s get started.
As stated earlier, HFT refers to a type of algorithmic trading. The main mission is to execute as many traders as possible within the shortest time frame. Trading periods are extremely narrow. It helps traders take advantage of different market movements.
The main difference between HFT and typical algorithmic trading methods is that the high-frequency method makes it possible to conduct thousands of trades on the spur of the moment. Meanwhile, traditional algorithmic approaches let traders execute only hundreds of trades at a time.
Generally, HFT is a tool for institutions and huge financial organizations. The system relies on complex mathematical algorithms that individual investors may find it hard to get. Advanced technologies make it possible to rapidly analyze thousands of events and news in a matter of seconds. As a result, HFT delivers plenty of additional trading opportunities and market entries.
The main challenge is that HFT comes with specific requirements. High-frequency trading calls for super-powerful computers equipped with cutting-edge software and trading programs to open and close positions in microseconds. In simpler words, HFT can be used to reduce latency when delivering market participants to their main trading destination.
HFT is 100% legal to use. However, it is very likely your online Forex broker will not permit it. Moreover, some brokers prohibit Forex strategies that refer to latency-driven arbitrage methods. So, you have read all terms and conditions before selecting a platform to trade. Otherwise, you can violate the broker’s rules.
Although the general HFT practice is legal, some of its formations are still very arguable and controversial. Mainly, they include spoofing and front-running. Let’s have a closer look at each of them.
The spoofing practice takes place when the HFT system starts rapidly placing a huge number of trades. However, orders are placed not to be executed. They are canceled by the algorithm before being executed. The main mission of this practice is to create a vision of demand. In simpler words, it creates artificial demand for an underlying asset.
Sometimes, HFT system followers or financial institutions that apply high-frequency trading, can spot significant impending orders for a certain currency pair. They are identified before execution. As a rule, it is an illegal practice performed by insiders or non-public data providers. Eventually, HFT institutions get a chance to buy a huge amount of the asset and then sell it for an enormous profit.
The industry has seen many different rules to regulate such practices as front-running over the last 2 decades. The main idea is to protect all market participants, ensure fair trading conditions for everyone, and uphold market integrity.
Today, we can see so-called universal speed bump methodologies used to slow down incoming orders to level the field for all players. Besides, the majority of HFT systems are prohibited not only by online Forex brokers but also by other trading venues.
Despite the fact, HFT may have some advantages (mainly for institutions), it does not bring any good for individual and retail trades. Besides, it calls for enormous investments and hardware and software to ensure smooth performance. Otherwise, it makes no sense. As for the main pros and cons, they are as follows.
High-frequency trading is just another modification of algorithmic trading or bots. The only difference is that HFT makes it possible to execute a bigger number of traders in a shorter time frame. However, the practice is far from perfect. It will hardly meet the expectations of individual investors. Mainly used by financial institutions, it requires enormous computer resources and technical knowledge.
Professional market players and beginners usually avoid HFT systems to stay away from troubles and benefit from fair trading with a trusted and time-tested online Forex broker.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.