The High Frequency Trading (HFT) system is the result of authorizing the electronic exchanges in 1998 by the US Securities and Exchange Commission (SEC). The system has always been a less discussed and less explored domain for investors because they do not realize the importance or benefits of this trading methodology.
In brief, the HFT is the process of buying and selling stocks with the help of extremely speedy algorithms produced with the help of powerful computers. The shares are bought and sold within a matter of milliseconds. The powerful computers can scan dozens of private and public marketplaces simultaneously and generate complex algorithms for the buyer or seller to help make decisions instantly. Goldman Sachs, Renaissance Technologies, IMC and Merrill Lynch are few of the major investment trading groups and banks engaged in HFT.
Characteristics of the High Frequency Trading
Since the trading is done with short position holding funds, the trading characteristics are devised around for facilitating the speedy transaction. In a way, this trading frequency resembles day market share buying and selling and also because there are very limited
positions that are carried overnight. Terms of which an investor should be aware:
ULLDMA – The Ultra Low Latency Direct Market Access is the way bypassing the discretionary methods of the brokers and executes speedy trading flow. Under this, the brokers can keep a tab on the behavior of the clients but since speed is the key here, the DMA should avoid delays for more than a millisecond.
Low Latency – For orders to be collected and executed within milliseconds the trading firm must have collocated real time trading platform of high frequency otherwise, investing will become difficult.
Limited Shelf Life – Since these are short holding or micro level strategies of investment, they have limited shelf life. The frequency of market interactions and competitors edge changes daily so the shelf life of investments is less even though the investing firm remains constant. Speed and mobility is the key for success in high trading markets.
Strategies of HTF
There are four groups of trading high frequency shares in the market, devised with consideration to the quantitative approach of the model.
Market Making – It is the process of imposing a limited order value on the current market price of shares and usually, the limited order price is less than the current price. The market making strategy is the preferred mode of most firms dealing with HFT
Ticker Tape Trading – Similar to filter trading, this strategy means decoding the embedded information in large amount of data that has not yet been made public for consideration. The market data could be trading announcements or any other event that has the potentiality of changing the market scenario.
Event Arbitrage – This strategy is used for gaining short-term profits in response with predictable short term frequency trading.
High Frequency Statistical Arbitrage – This strategy means exploiting the temporary deviations from statistical security relationships such as equities, foreign exchange or futures. This involves using traditional arbitrage methods like interest rate parity in the foreign exchange market.
To conclude, HFT is a profitable way of generating income through buying and selling short term holding positions on seconds’ basis with the help of computer quantitative analysis.
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