High Frequency Trading

Very often, a complex name hides a simple truth. Many people, having heard about high-frequency trading, begin to complicate things and invent all sorts of theories.

In fact, high-frequency trading is nothing more than pips , and the speed of opening and closing is so high that you, as an ordinary person, may not notice how the order was closed or opened, since in high-frequency trading the speed of opening and closing a transaction is calculated in milliseconds.

All this became possible thanks to the development of robotic trading and software, since only a machine, but not a person, can make decisions and open transactions at such a speed. However, opening and closing speed is not the whole point of high frequency trading.

By deciphering such Forex terms, you can understand the very essence of their practical application as a strategy.

What is the basis for a high-frequency trader's income?

A distinctive feature of high-frequency trading is the extremely high speed of order processing. The speed of opening and closing orders is not as important as receiving quotes and accessing information before anyone else.

Thus, high-frequency trading is based on the fact that companies engaged in it see market changes much earlier than the average trader due to the absence of intermediaries and various technological barriers. Every fund that engages in high-frequency trading is located near an exchange and has direct access to the market.

Therefore, this type of activity is only possible when trading stocks, futures , and other underlying assets. In the forex market, high-frequency trading is practically never used due to its weak advantage over other players.

In terms of earnings, high-frequency trading algorithms open dozens of trades per second, with the profit per trade potentially amounting to a tenth or even a hundredth of a pip. Therefore, to earn real money this way, a position must be opened with a large lot, which entails high risks.

High-frequency trading strategies

High-frequency trading strategies for making money are extremely simple to understand, but difficult to implement. So, let's take it one step at a time:

1) Classic arbitrage. The strategy involves a trader identifying patterns in the correlation of the same asset across different exchanges. Knowing a split second earlier how the price will move on another exchange, the algorithm opens trades, thereby capturing a share of the profit.

This method is also applicable to the forex market due to the varying speeds of receiving quotes from brokers. However, you should be aware that forex brokers prohibit arbitrage, so using prohibited methods can result in you losing your profits and deposit.

2) Providing liquidity to brokerages and traders. Because a high-frequency trading company is located near exchanges and has direct access to them, it can act as a liquidity provider for brokerages and charge a fee in the form of a spread. Therefore, when working with a brokerage, you should understand that they receive quotes from high-frequency trading firms.

3) Using the advantage of speed of obtaining information relative to other players in the market.

4) Detection of hidden orders from large players. The algorithm sends small-volume buy or sell orders and measures their execution time. The faster the execution, the more likely it is that there is a large player on the other side with a large volume that can influence price .

Disadvantages of high-frequency trading

As I've already mentioned, the position is opened with a very large lot, so the risks involved are very high. Add to this the fact that the number of orders per second can be measured in dozens, and even the slightest algorithm glitch could result in catastrophic losses for the company within an hour.