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High-Frequency Trading and its future in finance

High-frequency trading is a financial innovation that deals with the use of computer software tools to carry out numerous transactions at the drop of a hat. It is a fintech and is also known as HFT. It employs the use of complicated algorithms to investigate different business sectors and carry out orders depending on market conditions. Commonly, the brokers with the quickest execution speeds are more productive than dealers with slower execution speeds. 

The HFT is also known for high-profit rates and requests to trade proportion, in addition to the high speed of its orders. Citadel LLC, Tower Research, and Virtu Financial are among the top known HFT firms. 

Understanding High-Frequency Trading

This form of fintech gained its grounds during the time when exchanges began to offer motivation for organizations to add liquidity to the market. For example, the New York Stock Exchange has an organization of liquidity suppliers called Supplemental Liquidity Providers who bring in the aspect of competition to the market and also liquidity for existing quotes on the trade. The NYSE pays a charge or discount for giving said liquidity, to incentivize companies. The normal SLP discount was $0.0019 for NYSE-and NYSE MKT-recorded securities on NYSE in July 2016. With a huge number of exchanges every day, these lead to high levels of profit. In 2008, the SLP was launched after the breakdown of Lehman Brothers when liquidity was a significant worry for financial specialists.

Benefits of HFT

The fact that HFT has made conditions for volatility in the market better, is one of its main benefits. It has also eliminated the aspect of major differences in price quotes that, in any case, would have been small. A trial of this was done by adding more charges on HFT, consequently, bid-ask spreads increased. A study reported how Canadian bid-ask spreads changed when the administration presented charges on HFT, and it was discovered that bid-ask spreads rose by 9% during which online trading in the UK reached its peak as participants used more up-to-date software and algorithmic trading.

The real problem with HFT

HFT is questionable and has been met with some cruel analysis. It has substituted various intermediaries or agents. It uses algorithms and mathematical models to decide, it takes out the aspect of human interaction since it is taking all the human decisions. Also, it was noted that since the choices are made within split seconds, there could be major changes that would occur on the market for just no reason. For instance, On May 6, 2010, the Dow Jones Industrial Average dropped 1,000 spots, which was a 20% drop in only a few minutes. This drop was its biggest intraday before rising again. According to an administrative report, HFT was accused of a huge request that set off an auction for the crash. 

The HFT has continued to gather more critique as the years go by, as it also permits big organizations to benefit at the cost of the small traders or the retails and institutional speculators. It was also criticized for the liquidity given by HFT ghost liquidity, meaning that it provides liquidity that is accessible to the market at one second and is gone the following, keeping merchants from really having the option to trade this liquidity. This fintech is talked about a lot in the media. Although it has some positive feedback especially from those who have invested money into the business, it is facing a lot of backlash as the process is fully automated and eliminates the possibility of a broker and human interactions. Small traders lose a lot of money in this business while larger corporations benefit massively and even from the losses made by the little folk. 

Challenges Of HFT

Those against HFT contend that the use of algorithms and a mathematical model can be customized to send several fake requests and seconds later. Such usurping briefly makes a bogus rise in demand or supply causing value irregularities, which are taken advantage of by HFT dealers for their potential benefit. The SEC created a market analysis system in 2013, which screens various business sectors for information in split seconds for recurrences to attempt to get deceitful exercises like deception. HFT also has a very high cost of entry which hinders many investors from entering the market. Some of which include:

  • Setting up fast exchange execution structures for convenient trade execution 

  • Algorithm development

  • Building a foundation that requires regular significant expense updates 

  • Membership charges towards information feed 

The markets have become crowded with members who try to develop new software to get an edge over their rivals by continually improving algorithms and adding to the foundation. Because of this scramble, it makes it difficult for traders to take advantage of price anomalies to make profits, regardless of whether they have the best PCs and top-end networks. Furthermore, the possibility of exorbitant glitches is likewise driving off possible participants.  In this way, some significant obstacles for HFT's future development are its declining benefit potential, high operational costs, the possibility of stricter guidelines, and the fact that there is no space for a blunder, as misfortunes can make investors lose millions in a matter of seconds. 

The Current State of HFT

HFT has the possibility of development abroad. Several stock trades at times embrace the idea OF HFT nad its firms and are also opening up to the idea globally. On the other hand, HFT firms experienced legal claims deception with regards to its split-seconds timing, which plays against trades. In 2012, France was in the middle of growing hostility, is one of the first countries in Europe to place heavy taxes on HFT, and Italy did the same. 

In October 2014, US specialists researched evaluated how HFT affected the markets on a quick episode of instability in the Treasury market. Despite the fact that it found that there was no single reason for the commotion, the report didn't preclude the capability of future dangers being brought about by HFT, with regards to effects on pricing, trading volumes, or liquidity.  

Bottom Line 

The development of new algorithms and high-speed computers has made boundless prospects in exchange. However, HFT is a good example of fast innovations that have, for quite a long time, been dominating firms’ systems and permitted huge advantages to just a few organizations. Although HFT might lead to fewer opportunities for brokers in setting up business sectors like the US, some new businesses are optimistic about HFT investments.


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Konstantin Rabin

Konstantin Rabin

Head of Marketing


Member since

18 Aug 2015



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