Have you ever heard of High-Frequency Trading? It turns out that High-Frequency Trading can cause the market to move quickly without any underlying reason.
Therefore, several criticisms are aimed at the use of this High-Frequency Trading. Then what is real High-Frequency trading? how does this affect the market, is this a profitable trade?
This question may tickle your mind to keep reading this article.
Work from home CFD, forex trading online with TenkoFX
TenkoFX broker regulated by IFSC Belize
- 1 High-Frequency Trading explained
- 2 Does high-frequency trading work?
- 3 High-frequency trading impact on markets
- 4 Is high-frequency trading profitable?
- 5 Is high-frequency trading legal?
- 6 How does high-frequency trading make money?
- 7 Risk High-Frequency trading
- 8 High-frequency trading vs scalping
- 9 High-frequency trading ea
- 10 High-frequency trading Malaysia
- 11 Final Thought
High-Frequency Trading explained
High-frequency trading is an automated trading method used by large investment banks, large investment managers, and institutional investors who use computation to transact large quantities of orders in a second.
This high-frequency trading platform allows traders to execute millions of orders and scan a wide variety of markets and exchanges in seconds, thus providing a huge advantage to institutions using the platform on the open market.
The system uses complex algorithms to analyze the market and is able to spot emerging trends in a fraction of a second. With its ability to recognize shifts in the market, the trading system sends hundreds of baskets of stocks onto the market with a favorable bid-ask spread for traders.
By anticipating and beating trends to the market, institutions that apply high-frequency trading can get favorable returns on the trades they make to the essence of their bid-ask spread, thus making significant profits.
Citing to Investopedia, several firms that use High-Frequency Trading, also known as HFT, are Tower Research, Citadel LLC, and Virtu Financial.
High-Frequency trading characteristic
The Securities and Exchange Commission (SEC) does not have a legal definition of HFT. But in general, it has features as below:
- Use of exceptionally high speed and sophisticated programs to generate, route, and execute orders.
- Using co-location services and individual data feeds offered by exchanges to minimize network and other latency.
- Use a very short timeframe for establishing and liquidating positions.
- Submission of a number of orders that were canceled immediately after submitted.
- End the trading day as close as possible to the flat position.
Does high-frequency trading work?
High-Frequency Trading is trading at a very high speed, HTF traders do not hold their positions for long, even orders take only a few milliseconds to open and close positions.
Such trading speed is impossible for humans, even if you try to manually open and close a position in a few seconds it is still quite difficult to move your finger.
However, because High-Frequency trading uses a very complex algorithm using a computer that has high specifications, millisecond speeds can be done easily.
The algorithm in HTF also does not just open and close positions but also uses data in the market to analyze it and when the opportunity arises, it will open and close positions at high speed.
Transactions are also carried out in large numbers, and this takes advantage of profit opportunities in small fractions but with high trading frequency.
High-Frequency trading is not possible through a trading platform like MetaTrader in general. Internet speed that may be delayed will cause the software not to work properly.
This uses a specially designed supercomputer and usually has direct access to the exchange using a brokerage account which is also known as naked access.
High-frequency trading impact on markets
High-frequency traders do aim for an imbalance between supply and demand, using arbitrage and speed to their advantage. These traders are not based on fundamental research about the company or the growth prospects for the stock, but on the opportunity to catch profit.
Even though HFT does not have a specific target, it can still cause additional damage to retail investors, as well as institutional investors such as mutual funds who buy and sell stocks in bulk.
How High-Frequency trader affect the market
HFT traders do not rely on fundamental analysis, but they use algorithms to arbitrage the bid and ask for gaps that occur in the market.
Before the HFT trader enters the market, maybe the price movement is steady and everything is going normally.
When the arbitrage opportunity comes, HFT will enter, and it consists of large investors, hedge funds, pension fund firms, and so on.
When they enter the market, they buy stocks not only in a matter of hundreds of dollars, but it could be millions of dollars. This is what causes the stock price movement to be strange because no important news will be released.
Retail traders will usually experience losses due to this HFT because retail traders only transact in smaller amounts.
The large volume is what moves the market up and down with an uncertain trend, the lumpy trend is the action of the HFT trader. The illustration above is shown by a red line which causes the price to up dan down without an exact trend.
Is high-frequency trading profitable?
High-Frequency trading uses a supercomputer with a very complex algorithm. Not all programmers will perfectly create HFT software that always wins the battle.
According to the CFTC research, active HFTs get a higher profit compared to passive HFTs. Traders using active HFT achieved 90.67% profit while traders using passive HFT only got 23.22% profit.
Subsequent research concludes on long-term and short-term trading. Aggressive HFT is easier to lose money in the short term but profitable in the long term analysis but still intraday.
On the other hand, passive HFTs are actually profitable in the short term but losing money in long-term intervals.
Is high-frequency trading legal?
Even though HFT trading is very profitable, it raises some criticisms. Some argue that high-frequency trading is unethical because it causes inequality of profits for large firms against smaller institutions and investors.
However, despite the criticism, in general, high-frequency trading is legal, because there are no clear rules regarding the prohibition of using HFT trading.
Maybe this is also due to the profit opportunities resulting from HFT trading.
Why is high-frequency trading legal?
Maybe big profit because of HFT trading making this is legal. By offering a small incentive to market participants, the exchange gets additional liquidity due to HFT trading.
Meanwhile, the institutions that provide liquidity are also seeing increased profits on each trade they make, due to the spreads they make.
Even though the spreads and incentives amount to only a fraction of a cent per transaction, multiplying them by trading a large amount each day can yield substantial returns for high-frequency traders.
How does high-frequency trading make money?
High-Frequency Trading apart from trading in general, also gets profit from rebates.
Maybe you know that the rebate is a small fraction returned by the liquidity provider for a client. Indeed, if it is calculated in money it is only a few cents, but their aggressive HFT traders can trade hundreds of times a day or even more or can reach thousands of times.
If all the transactions made are profitable, he will get an additional gain from the rebate. And will become additional profit.
Is it true High-Frequency Trading yields every day?
Citing from quora, that it is true that HFT trading can generate yields everyday trading.
But another answer depends on the infrastructure and algorithms used. If in developing a correct algorithm, there are no errors, and the co-location server is close to the data feed, it is possible to get profit every day.
Another influence is news, for example, the recent Brexit which can cause HFT trading to be less than optimal. Because usually HFT trading profit only ranges in percentage between 0.10% to 0.15%.
Who does high-frequency trading?
High-Frequency trading requires a supercomputer as the main infrastructure, accompanied by software created using sophisticated algorithms that can process thousands of stocks and choose those that provide profit opportunities, either from arbitrage or from other assumptions.
So who use high-frequency trading are large firms, hedge funds, financial institutions with large capital.
They spend on infrastructure development with large funds so that the main target is to get profit every day, both from trading and rebates.
According to Wikipedia, several firms that use HFT trading are Tower Research Capital, IMC, Tradebot, and Citadel LLC. Jane Street, Chopper Trading, Tradebot Systems Inc., Five Rings Capital LLC, DRW Holdings LLC, Geneva Trading, Susquehanna International Group LLP (SIG), Virtu Financial, Allston Trading LLC, Hudson River Trading (HRT), Jump Trading.
And maybe there are many other firms that also develop High-Frequency trading because this is a profitable trade.
Risk High-Frequency trading
HFT trading uses a computer infrastructure that works without human intervention. Although HFT trading is generally profitable, there is some risk in the event of a computer system failure.
And if that happens it is very possible that HFT traders will experience big losses due to HFT transactions with large volumes.
Like as experienced by the firm Knight Capital Group lost nearly half a billion dollars due to computer problems. Additionally, HFT trading has been blamed for the flash crash. And has swept out hundreds of billions of dollars in market value.
High-frequency trading vs scalping
Maybe if you look at how it works, there are similarities between High-Frequency trading and scalping.
High-frequency trading takes profits only in small fractions between 0.10% to 0.15% in one shot. Meanwhile, scalping takes a profit of between 5-10 pips on each shot. It is a short-term day trading that can be very aggressive in trading.
HFT trading is still considered the most profitable compared to scalping. Because it uses a sophisticated supercomputer with a small error rate.
Another thing that distinguishes it is that most HFT traders trade in the stock market where the supercomputer is capable of processing thousands of data that humans cannot do.
Scalping in forex also depends on how the trader has the skills to play scalping. Most scalping manually, it will be more difficult to develop profits if the trader is often annoyed by his own emotions.
However, if scalping uses automatic trading, this will further reduce the bias of errors due to emotions.
How scalping makes money apart from trading profit can also be from the rebate system. This will increase the accumulated profit if he joins the forex rebate.
Trading platforms such as Metatrader 4, are only capable of executing up to a thousand orders. In contrast to high-frequency trading which can place orders of more than a thousand.
High-frequency trading ea
Although high-frequency trading is mainly for stock trading. But several developers have started trying to make HFT trades that run on the MetaTrader platform.
In the MQL 5 market, some are selling high-frequency trading robots for $ 500. But unfortunately, there is no trade history available so we can’t find out how it performed. And there are no reviews from traders who have ever bought it. So it is an expensive value because there is not enough proof of trade to be known.
While on the Forexfactory forum, there was someone who shared the free HFT robot he had bought. Unfortunately, it is a 2016 post and ea is no longer compatible with the current MetaTrader version.
Apart from that, I found the HFT EA (LIQUIDEX_V1), which is also in the MQL5 community. You can download it for free, but from some reviews, traders seem to have difficulty using this robot.
Download HFT trading for free
After searching several sources, I finally came across an ea called High-Frequency scalper. Looking at the evidence from Myfxbook, it looks like this ea is pretty good when viewed from the profit chart.
I found a High-frequency scalper from a telegram group, but I haven’t tried it yet. If maybe you are interested in this robot, you can download it at the link below.
High-frequency trading arbitrage
One of the ways of high-frequency trading is carried out by large firms or hedge funds is through arbitrage.
This is to take advantage of the small differences that occur in different exchanges. By using a super-fast computer, HFT’s advanced algorithm can make quick profits.
In addition, another way is to use limit orders at a thin distance above and below the current price. So they make a profit only from the difference between the bid and ask, but due to the large volume of transactions. It can make the price move according to the position.
High-frequency trading Malaysia
Malaysia is a country in Southeast Asia with an economy that is starting to grow. However, High-Frequency trading in this country is just a discussion, because it is not allowed on Bursa Malaysia, because its influence will cause retail traders to be excluded from the competition.
However, the discourse on that matter is to use High-Frequency trading in Malaysia. Still, more exchanges are still needed so that it opens up opportunities for arbitrage through High-Frequency trading.
High-frequency trading has an impact on the market. Because those who use this software are big traders, hedge funds, and firms with very large capital.
Even though there has been HFT software development for forex. The results are not yet certain whether it can be consistent or not.
This is due to the structure of the forex market. In which market participants consist of other giant institutions. So that no one firm can control prices for a long time.
Read more article