What is high-frequency trading (HFT)?
The trading process is constantly evolving. It all started with verbal agreements between buyer and seller. Then markets and exchanges appeared, most of which now conduct trading online.
In pursuit of speed of operations and profit, humanity is constantly inventing new ways to make money. This list includes HFT.
High-frequency trading (HFT) is a type of automated trading that is characterized by the high speed of execution of trading operations. Speed is ensured by powerful computers and servers located next to the exchange.
Of course, HFT cannot replace the traditional approach to investing, where a few days to several months pass after opening a trade. HFT is rather an additional opportunity that allows you to earn money where there was none before.
High-frequency Forex trading is not for everyone. At this stage of technology development, powerful and expensive equipment is required. To execute 100 trades per second, you need high-speed Internet. This requires a large investment and an agreement with the exchange to place the equipment as close as possible to the main computer (preferably on the same trading floor). Renting space next to the exchange server also costs a lot of money.
That is, if you do not have tens of millions of dollars, HFT trading is not for you. Typically, these types of strategies are used by large institutional investors and hedge funds.
In addition to costs, high-frequency Forex trading requires special software and a trading strategy. They are not publicly available, since they are developed individually by programmers who are able to write a working and effective algorithm.
However, is high-frequency trading really inaccessible? Maybe there is something in the strategy that you can use in your trading systems. Below, you will learn what high-frequency Forex trading is and how ordinary traders can use it.
Characteristics of high-frequency trading
Let's consider the main characteristics of HFT algorithms. The United States Securities and Exchange Commission (SEC) singles out seven signs of high-frequency trading:
1. requires high-speed hardware and sophisticated software for order generation and execution;
2. the time frame for placing, changing, or canceling an order, as a rule, does not exceed five milliseconds;
3. colocation services for equipment placement are located as close as possible to the main exchange server. This allows you to minimize the time lag and reduce the number of potential requotes;
4. placing a large number of orders, which can also be quickly canceled;
5.ending the day without open positions, if possible;
6. the predominance of ultra-fast orders in the final order portfolio (more than 50%).
The SEC does not define high-frequency trading, but only names the general features of this approach. This is due to the difficulties of regulating the industry. In some countries, for example, China, Brazil, partly in India and others, HFT is prohibited.
To summarize, all HFT strategies have high execution speed and a large number of orders, and require sophisticated software and high-performance hardware.