High Frequency Trading – How does it work?

To understand what the HTF (High Trading Frequency) is, you must first understand what the algorithmic trading.

Well, in short, this type of trading consists of applying strategies through algorithms, that is, automating the operation.

It is true that the word algorithm gives a bit of respect, but everything is simpler than it seems. I tell you first hand, because if you read me you know that I do this type of trading.

And now yes, the real reason why you have entered this article is so that I can tell you a little about High Frequency Trading, from now on we will call it by its acronym ‘HTF’.

1. What is high frequency trading

High-frequency trading falls under the family of algorithmic trading types.

It consists of nanosecond operations, that is, the main objective is to achieve liquidity in the shortest possible time, an ‘entry and exit’ from the market.

As you know, before all this operation of buying and selling securities (stocks, futures, currencies, etc.) was done by hand…

1.1. How does it work?

First of all, it must be taken into account that to carry out this type of trading it is necessary to have state-of-the-art technology and be very close to the servers (investment of a lot of money in all this).

Once all this supply has been achieved, the objective is clear: a series of algorithms are programmed so that purchase and sale orders are launched based on the established parameters. All this in nanoseconds and yes, we are already talking about HFT pure and simple.

The main features of high frequency trading are:

  1. Carry out an extremely high number of operations
  2. Orders are canceled quickly
  3. The positions are kept open for a very short time (very little).
  4. No open positions are held at the end of the day
  5. The profit margins of each operation are very small
  6. Use data flows and proximity services
  7. It is carried out in operations on its own account. For example: a bank invests for its own benefit instead of doing it on behalf of a client.

1.2. can anyone do High Frequency Trading?


But in reality it is mainly based on a question of whether or not you have the technology that is needed to carry out this type of trading.

What does have to be clear is that HFT is neither the best nor the worst way to trade, but it is not true that it is the only way to get a million-dollar return in this sector.

And now, let’s go.

1.3. Since when can you do this type of trading?

The dates point to the United States SEC authorizing the electronic exchange of securities in 1998.

At first these exchanges were made in seconds, until today we would be talking about market operations that last microseconds, that is, operations at the speed of light, literally.

As data of interest, according to the latest studies, the total volume of transactions by HFT in the US represents 60% and in Europe it is around 40%, London being the pioneer center in handling machines to carry out these operations.

1.4. Companies that work with HFT

As I have told you a little before, not everyone can afford to get hold of the technology that high-frequency trading requires; So yes, as you imagined, the vast majority of the time this type of trading is carried out by companies roughly.

Many companies use high-frequency trading to create supply and demand.

Some of the most famous traders in this type of strategy are Knight Capital Group, Getco LLC, Citadel LLC, Jump Trading, LLC, Goldman Sachs and Virtu.

1.5. How it influences the markets

Obviously, if this trading were absolutely surreal, companies would dismiss such operations.

There are different techniques to obtain profitability in the market with high-frequency trading, although you have to take into account the factor that everything is influenced by the machines that are needed to manage these operations.

One of the techniques that I mention is that of saturation. This is carried out by a group of companies when they believe that an investor is going to make a purchase of shares. At that precise moment they acquire them and sell them for a slightly higher price before the buyer comes forward. To be profitable you have to be very fast.

The other technique is interference. It consists of sending an order and eliminating it in tenths of seconds. This causes confusion in the stock market and investors make mistakes.

And finally, there is also the technique of cheated. This technique is based on pretending to buy shares when what you want is to sell.

On the other hand, I did not want to conclude this post without talking to you a little more in depth about some of the advantages and disadvantages that I consider high frequency trading to have.

1.6. Advantages of high frequency trading

When we refer to algorithmic trading, that is, automated operations, and we add high-speed execution, we are talking about the possibility of market participants to operate with higher volumes and with greater speed, with the direct consequence of ensuring liquidity and risk transfer.

1.7. Disadvantages of high frequency trading

The main disadvantage of high frequency trading is the technology intervention

It seems like a direct contradiction to the concept, and it is. But we must bear in mind that the machines used to do this type of trading are designed to carry out tens of thousands of operations in 1 second and the result on prices and the variables executed can lead to an absolute catastrophe.

“People are no longer responsible for what happens in the market; it is computers that make all the decisions” (Michael Lewis, author of flash boy)

On the other hand, high frequency trading is also considered to provide phantom liquidity only to investors who manipulate this type of trading.

Therefore, as it is used in general by the institutional and business sphere, this generates an unfair advantage over some and other investors.

In any case, if we make a slight balance between the advantages and disadvantages of this type of algorithmic trading, we can reach the point that (at least it is what I personally consider) rather than being in favor of or against HFT, the most sensible thing to do is trying to work to mitigate some of the negative effects of this type of trading and, of course, promote the positive ones.

1.8. various conclusions

As a main conclusion, after having told you all this about HFT, the opinion that you give us does not really matter.

Indeed, regardless of whether it seems good to us or not, the HFT was implemented in the market to stay and it is a type of trading to take into account in all our operations.

In fact, we could define high-frequency trading as the technological revolution of the system applied in the financial market, precisely due to the digital age in which we find ourselves. Of course, it is not for everyone as we have seen (or for all budgets). It has its public.

There are 2 wars: technological and criteria. With discretion, you compete in profitable systems and with greater equality of conditions

As I always say, apply criteria in your perception of trading, execute your own strategies and systems that generate profitability for you.

The best thing about this industry is that your capital depends and does not depend on you, that is, you constantly manage that duality and this supposes, in a complementary and simultaneous way, both the risk and the satisfaction of belonging to this field.

But always, always, it is very useful for us to be updated on everything that happens in the market on a daily basis, because in this way, whatever the trading that best represents you or suits you, you will be able to have at your disposal a series of profitable systems that They allow you to dose benefits each time you carry out different operations.

Above all, with this post I also wanted to make you understand that in order to do profitable trading, it is not necessary to get frustrated if you cannot carry out high-frequency trading because it is no longer the aspect in which you work, but your management and organization of your own operations in the market.

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