In simple terms, the high frequency trading refers to the speed in which firms conduct trade with the help of supercomputers. The competition varies with just milliseconds of differences and thus the profits vary. The high frequency trading firms moves from currencies to stocks fleetingly as they look forward for a ‘signal’ to make the deal. Other firms who earn high profits from HFT are the market makers that provide security to either side of the buying and selling order.
The profits of high frequency trading firms soar high not because they invest millions of dollars but because they invest for tiny gains, measured in pennies, which ultimately build up into long term gains. The trick here lies in identifying the “inefficiencies” in the market and before the inefficiencies go away, the firms trade to make money for themselves. Where does the firm make the profits? The firms make profit by capitalizing on the difference between the amount the investors are willing to pay and the amount the buyers are willing to pay. Such firms work on both the buying and selling side. Moreover, certain HFT firms are also willing to provide rebates to those agencies that can provide shares to the firms when needed.
Since the time of the establishment of high frequency trading, firms like Goldman Sachs Group, Citadel Investment Group LLC, Getco LLC, Renaissance Technologies LLC, Wolverine Trading LLC, Jane Street Capital LLC, Jump Trading LLC, and Hudson River Trading LLC are some of the major key players of this industry. Partly due to the profits, the high frequency trading is such a rage also because of its potentiality or growth anticipated in the coming years.
Furthermore, there has been certain discrepancies in the way the traders of HFT function, giving rise to certain unscrupulous measures of taking undue advantage of the individual investors. To avoid the misuse of high frequency trading, the firms’ needs to be provided with better guidance about the trading practices that are acceptable and not acceptable. The investors need to be given clear understanding about flash orders and unfiltered access. The firms also need to be aware about the rules and regulations governing the market manipulation in the light of the new HFT paradigm. In addition, a pre – trade risk checking should be made mandatory before provide any firm with the right to access the electronic market.
The profit earning probability of high frequency trading platform is immense. However, clear guidelines must be provided to firms to conduct the business in an ethical manner.
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