What is High-frequency trading (HFT)
High-frequency trading is an automatic, powerful computer program used for transacting a large number of orders in a quick second. It works through highly complex algorithms for analyzing markets and buying currency depending on the market situation. An enormous number of orders are placed through this sophisticated system. Here, traders with fast order placing are more lucrative than others.
How is high-frequency trading carried out?
Institutional investors do high-frequency trading, hedge, international banking funds, and other professional traders. It scans all market positions in seconds and executes thousands of orders, giving investors an advantage to get profits through the platform. It is sometimes unclear which platform is funding and which is the best forex brokers in south africa for investment purposes.
Is the High-frequency trading market regulated?
According to FC, the regulatory commission for the trading market, the transparency of trading markets has been put at risk. It could distort the small investors, and it is a big concern due to its larger expansion over the years. It is expected to become $500 million worth by 2028, and it is increasing because of big investors moving toward this algorithmic way of trading.
Features of High-frequency trading:
The Security Exchange Committee has described this algorithmic system through the following attributes:
- Numerous orders are canceled outright after placing them as the market has already been looted by big investors using HFT.
- The huge volume of orders.
- Positions are held for a short amount of time.
- Priority trading is encouraging while pushing down small clients.
- All markets are closed at the end of each trading day.
- Colocation and individual data services minimize the network.
- The risk: reward percentage is huge following long-term investment plans.
Different algorithms in High-frequency trading:
There are four different types of algorithms in this HFT system:
- Statistical: Also described as an Arbitrage strategy, which analyzes historical data to place orders.
- Auto-Hedging: reduces risk percentage.
- Execution strategy: is a broad field covering algorithms to perform specific tasks.
- Direct market access: makes traders place orders quickly while creating a huge demand in the market
Drawbacks of High-frequency trading:
- Many investors have complained about the liquidity of HFT being momentary. It vanishes within seconds, risking millions of bucks of currency at stake.
- Allegedly, HTF favors big institutes and economy hubs to have the upper hand. It gives little favor to larger firms over the small investors.
- It removes small bid-ask spread by giving favorable returns by their bid-ask spread. Hence, big investors get more advantages.
- Fast orders make the market more volatile and susceptible to collapse soon.
Regardless of the huge expansion in the market, the HFT market has many cons, too, which are rarely discussed. The committee has regularly shown risks of this system which means it could fine big institutes. They make money by causing losses to small investors as they make a huge breach between supply and demand which automatically makes sellers profit.