Ultrafast Trading
Candlefocus EditorHFT is complex algorithmic trading in which large numbers of orders are executed within seconds. It is usually used to take advantage of small price movements which are too short-lived for traditional traders to profit from. HFT uses highly sophisticated algorithms to identify the best possible time for a financial firm to buy or sell its assets. This strategy allows firms to execute transactions faster than the traditional methods of manual trading and allows them to benefit from faster movements in the market.
HFT adds liquidity to the markets and eliminates small bid-ask spreads thus enabling financial firms to consistently make profits without having to wait for the price of an asset to make a significant movement. HFT strategies can be used to buy or sell a certain asset in small quantities so as to add liquidity to the market. This prevents prices from becoming too volatile and allows investors to trade without large spreads or minimal spreads.
Although HFT is a beneficial technology for traders, it has been criticized for allowing large companies to gain an upper hand in trading. Companies that are able to afford the best technology, computers and the fastest internet connection have an unfair advantage over smaller traders by being able to identify and execute orders significantly faster than their competitors.
Another complaint is that the liquidity produced by this type of trading is momentary—it disappears within seconds, making it impossible for traders to take advantage of it. HFT trades are largely done in milliseconds and therefore, a large number of orders can be cancelled even before other traders can submit their orders. Therefore, traders are unable to benefit from the liquidity created by these market orders.
Despite the criticisms, ultrafast trading provides a great benefit to traders who can take advantage of the technology to enter and exit the market with greater speed and accuracy than ever before. The ability to capitalize on price movements which are too short-lived for traditional traders to exploit can generate profits which would otherwise not exist if trading was carried out manually. Although it has drawn criticism from some quarters and investors should use caution when participating in this kind of trading, HFT can be an extremely effective tool when employed properly.