Tag: high-frequency trading

  • HFT Strategies – The Tips and Secrets

    HFT Strategies – The Tips and Secrets

    3 min read

    HFT strategies - the tips and secrets
    HFT uses practically basic and simple strategies. High-frequency trading is not about implementing the strategy, it is all about speed of execution and flexibility.

    Well, the main strategy of HFT is to run faster than others. Of course, the principles of high-frequency trading (HFT) firms are secrecy, strategy, and speed.

    Algo trading is linked with the execution of trade orders. But HFT refers to the implementation of proprietary trading strategies.

    High-frequency trading consists of a variety of AT.

    Yes, both enable traders and investors to speed up the response on market data.

    The society of market participants using HFT is extremely mixed.

    There is a crowd of various organizations with various business forms that use HFT and there are many hybrid models.

    For example, some brokers and exchanges are utilizing HFT systems. So, in the estimation of HFT, it is essential to consider a practical perspective.

    It doesn’t matter if HFT is just an add-on technology to realize trading strategies.

    Liquidity providing is one of the HFT strategies.

    HFT strategies - the tips and secrets 1
    Well, the most frequent HFT strategies are to serve as a liquidity provider.

    How does HTF provide it?

    HFT liquidity providers have two primary reservoirs: when they provide markets with the liquidity they pocket the spread between the bid and ask limits. Also, there is a trading income by granting discounts or lowered transaction fees. The aim is to increase market quality and attractiveness.

    HFT firms will never discover their ways of acting. The significant experts linked with HFT are undercover. Well, this is not quite true. Maybe we could say they want to be in front of the public eyes less than others.

    Those firms operate with various strategies to trade and earn money. The strategies are often many kinds of arbitrage. For example, volatility arbitrage, or index arbitrage.

    HFT employs software that is incredibly fast. They have access to all market data and can make connections with minimum latency.

    HFT firms regularly use own money, own technology and a number of special strategies to produce profits.
    There are numerous strategies applied by traders to earn money for their firms.

    Even the controversial strategies.

    For example, HFT firms may trade from both parties.

    Hence, they can place orders to sell using a limit order above the market price. Also, they can place the buy order a little bit below the market price.

    And, voila! There is a profit for them. The difference between the two prices. They are market makers. All these transactions are very fast, in a millisecond by using algorithms and robust computers.

    Spread capturing as HFT strategy

    HFT strategies - the tips and secrets 2
    HFT firms are liquidity providers. They profit from the spread between the bid and ask prices.

    How?

    They are buying and selling securities all the time.

    With each trade, they receive the spread between the price at which shareholders buy contracts and the other at which they can sell contracts.

    Rebate driven strategies

    The liquidity provision strategies are developed on particular stimulus systems.

    In order to encourage liquidity providers, some trading venues use unsymmetric pricing. They charge a lower fee or give a rebate for market makers or passive trading.

    Why?

    Such traders bring liquidity to the market.

    On the other side, for more aggressive tradings they charge a higher fee. Why? Such traders remove liquidity from the market.

    An unsymmetric fee arrangement aims to boost liquidity provision.

    Point is: traders supplying liquidity earn their profits from the market spread. Fee discounts or rebates stimulate a market‘s liquidity.  

    On this way, those markets look promising comparing to their rivals.

    Arbitrage

    Chances to perform arbitrage strategies generally survive only for fractions of a second.

    But computers mission is to examine the markets in a millisecond. That feature causes the arbitrage to become the main strategy employed by HFTs.

    To conduct arbitrage HFT use the same method as traditional traders. But they use an algorithm to profit from short-lived differences between securities. The other types of arbitrage are not restricted to HFT and such, they are not the subject of this post.

    Latency arbitrage

    The latency arbitrage is the ability of HFTs to recognize new market information before other market participants even get it.

    The latency arbitrage uses direct data feeds and co-located servers to short the reaction time. Latency arbitrageurs profit from speed power. Such market participants can reduce the prices at which other traders are able to trade. That’s why you can find them under the name of predatory.

    Liquidity detection

    HFTs try to recognize the patterns other traders leave and adjust their actions accord to them. The focus of liquidity detectors is large orders.

    Liquidity detectors are getting information about algorithmic traders is usually called sniffing out the other algos.

    The bottom line

    HFT is not a trading strategy. It is the usage of advanced technology that performs traditional trading strategies. The individual trading strategies need to be assessed rather than HFT as such.

    HFT should never be banned. It would be contrary to market efficiency. High-frequency trading contributes to market liquidity and to the ability of the price creation.

    However, any strategies that have a contradictory influence on market integrity or enable market abuse, has to be are completely reviewed.

    This is particularly important for HFT. If anyone believes this technology promotes the implementation of abusing strategies, moreover, makes them more profitable and creates unfair circumstances on the market, should check the other participants too.

    Our confidence in technology is huge, but we are very cautious when it comes to the people.  

    Technology by itself is without morality. The people are those who can add it to high-tech.   

    Fortunately, we, ordinary people, don’t have any access to HFT.

    Don’t waste your money!

    risk disclosure

  • High – Frequency Trading (HFT) – Why to Use

    High – Frequency Trading (HFT) – Why to Use

    High - Frequency Trading (HFT) - Why to UseThe high-frequency trading algorithm or HFT provides fast and profitable trades. Learn how.

    By Guy Avtalyon

    The high-frequency trading algorithm or HFT is one of the two main types of algorithms. The other is the execution algorithm.
    HFT trading means to engage multiple algorithms in order to examine various markets. The orders execution is based on market conditions.

    It is a program trading platform that utilizes robust processors to conduct a large number of orders very fast. Actually, the whole operation takes less than one second.

    And it is a very important feature for traders.

    The speed of trade execution will decide if you are a profitable trader or you are not. The logic behind this is that HFT provides you a fantastic speed in trading. So, you can gain your targeted price faster than, let’s say, ancient trader, is going to do.

    The advantage of high-frequency trading is that it provides you a permanent view on markets condition because it follows market data in real-time.

    Is a High-frequency trading set in today’s markets?

    But there are some misunderstandings yet.

    HFT is very often a cause of disagreement among traders. The traditional traders don’t like algo trading at all.
    Yes, we understand why is that.

    HFT leads to some effects, very unknown to some market experts. Their opinion about the algo trading is the same.
    First of all HFT trading provides traders more advantages in the main processes.

    HFT applications can hit even a very small profit from huge numbers of executions. You must know that there are a million executions every single day in the markets all over the world.

    High-frequency trading will never hold the position for a long time.

    The old-fashioned traders say it can cause great volatility and results with losses when it goes wrong.

    Well, their opinion is not quite mistaken.
    Let’s say it is possible. And we will recall the year 2012 when really was tricky.  

    HFTs caused the knockdown to Knight Capital Group. After that accident, in many countries, HFT was reduced. For example, Italy has the rule to tax 0.02% on the transaction that takes less than 0.05 seconds. The rule was launched in September 2013.
    The other problem with HFT is there is no generally recognized definition. So, that can open the space for some confusion.

    The truth is that the digital era requires digital work for which we need digital equipment. This digital tool leads us to speed business and the trader’s business is to execute their trades fastest as it is possible. But the principle is the same as centuries before: when you are in the market, you would like to buy or to sell. And HFT provides traders to do it. Fast, very fast.
    Let’s break down HFT trading.

    What is high-frequency trading?

    The high-frequency trading is called ”black box” trading.

    It indicates to automated systems that regularly use complicated algorithms to buy and sell securities. Extremely fast!
    In the same manner, the algorithms do it at a much larger range than any individual is able to do.

    Previously we said that HFT provides a very small profit from huge numbers of executions, but thanks to the high speed and large volume they produce great returns to traders.

    How does it work?

    The algorithm follows a “quote level” that is created including bid and ask. In volatile markets, the quote level can be changed in a second. Honestly,  it could happen several times in a very short frame time.

    And the algorithm is going to do what? It will place your trade in the right direction and faster than you can do it by yourself.
    Without the algorithm, you will not be able to recognize all the opportunities. You might miss something extremely significant.
    Yes, you can tell how and when your trades should go, but even you are fast-acting on your mouse or mobile interface, it will take time.

    Moreover, the algorithm will buy and sell the same stock multiple times in a brief period of time. This means the algorithm will trade several hundred times in a single day.

    Yeah, here is some problem with that. Say, you are paying $1 commission. WOW! Be careful with your HF trading! But returns you can gain are bigger.

    Remember, you are using artificial intelligence.

    You have to know that 75% of US stock trades are placed by algorithms. This number will expand soon and it will continue.
    Why we are so sure of that?

    We people, humans, will never have such ability to process that volume of data, we will never have the possibility to estimate all information required to make a trade before our rivals. Sometime we will do that, but most of the time we will not. And to make a good decision we need time.

    Algorithms are able to operate with a million bits of data in one millisecond, at the same time they are able to make decisions and act.

    All alone! Of course, when you turn it on.

    So, why to use High-frequency trading (HFT)?

    High-frequency trading demands the lowest latency in order to keep a speed advantage over the retail traders. Complex algorithms are at the core of these programs. The algorithms give directions for acting to market circumstances based on highly automatic signals.

    Behind these programs lays very complicated coding. Millions, even billions of lines of code. Some of the biggest HFT companies have a continual profit during 1,000 trading days without a single loss.

    The speed, access, capital, and no holding time make advantages. And risk-averse and latency too. Latency is the time it takes for data to reach its endpoints. When latency is low that means higher speed.

    HFT has led to tighter bid-ask spreads.

    It makes transaction costs lower. The liquidity increased and pricing efficiency is raised. The main concerns about HFT are the ability to accent and stimulate market changes.

    For example, there is some risk with some out-of-control algorithm. Also, there are traders who can manipulate the market because they are scammers familiar with programming. That’s why every trader who wants to employ HFT has to be very careful when downloading such apps.

    Happy trading!