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    High Frequency Trading

    EST. 1996

What is High Frequency Trading?

With time, traders have moved further and further away from Wall Street in New York as new technology has emerged allowing individuals and firms to trade remotely with a network connection. At a certain point, advancement in technology has also created automated trading software and bots that have replaced humans and trade based on algorithms.

The modern-day world of trading stocks and commodities has become a battle between advanced algorithmic trading bots while human traders just scavenge off the remains with far less efficiency than their automated counterparts.

The use of trading bots has become widespread, accounting for a majority of trading volume in the market. Some estimates indicate that 80% of market trading volumes originate from Algorithmic trading. Algorithmic trading has many advantages compared to discretionary trading (human-based manual trading). Some of these advantages include:

  • Ability to make decisions completely independent of emotions
  • Monitors the market 24/7 since it doesn’t need any rest
  • Great consistency when compared to human traders
  • Quicker decision making most of the time when compared to human traders 

High-frequency trading is a type of algorithmic trading that makes up at least 50% of trading volumes. High-frequency trading, or HFT for short, is a competitive trading system that involved automated trading bots placing a humanly impossible number of buy or sell orders in a fraction of a second. High-Frequency traders mostly consist of sizable investment banks, institutional traders, and certain large hedge funds. With high-grade equipment and the fastest connections available, these bots compete with each other with victories defined by the millisecond.

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high frequency trading

A remarkable tactic High frequency traders deploy is setting up an extremely large number of buy or sell orders which will be canceled after a small percentage of the mare is fulfilled.

This allows high frequency traders to take the maximum advantage of the ask-bid spread before someone else makes use of the opportunity. This is also quite beneficial to investors since it improves market liquidity.

High Frequency Trading Strategies

Not all HFT strategies are the same. Various organizations make use of different strategies to gain an edge in the competition. Some of the most popular HFT strategies are:

Quote Stuffing

This is a fairly straightforward strategy that certain high frequency traders use to “confuse” and delay the processing time of other HFT companies. This is done by flooding the market with a large number of buy or sell orders and canceling them in a short amount of time so that the competitors’ computers will waste time processing these.

This causes them to miss on potential opportunities and lose pricing edge over the organization that deploys this tactic.

Event arbitrage

Event arbitrage is a term that is used collectively to represent trades based on analysis of news reports. This works by calculating the impact each announcement would have on the price movement of an asset. For example, a high frequency trading program would have a software to scan for certain words on every news report that was published, almost the instant after it was published.

These are then calculated in a complex equation to calculate the scale of impact it would have on the interest of investors and traders. Buy or sell orders are placed accordingly to gain as much profit from the reports as possible.

Index arbitrage

A trading strategy that is employed by many high frequency traders. High frequency traders attempt to obtain profits from the difference between versions of the same index (an index value is derived by calculations involving the underlying holdings) or between a particular index and its other components.

These are often just millisecond windows of time that a high frequency trader may profit from. Consequently, this helps eliminate any inconsistencies in market price. 

Controversies and Fines

Just like in every other field of advancement, there are individuals or organizations that have capitalized on the unfair and illegal use of HFT. Some high frequency traders have programmed bots to receive an unfair advantage in the market. Sending multiple false orders could lead to market manipulation, which is deemed illegal. In such instances, organizations have been made to pay large amounts of money in fines by regulators.

For example, Knight Capital was fined 12 million dollars in October 2013 for sending a large number of orders into the market. Event arbitrage traders should pay attention to their source of information to avoid insider trading, and quote stuffing can lead to its own array of legal troubles.

High frequency trading has been viewed in a negative light by a handful of investors since it is impossible for regular casual investors and traders to trade profitably in the market with the presence of these high speed trading bots. Quite simply put, the widespread use of HFT is simply unfair for human traders since they cannot compete with organizations that use HFT, and cannot afford to produce their own HFT set up. This is in wide, the major ethical issue HFT users face today since the market should present “equal opportunities for everyone”.

Should I use a VPS for High Frequency Trading?

high trading

High frequency trading is extremely demanding when it comes to the quality of hardware used, and the quality of the network connection it uses. Fibre Optic cables are often the technology used to transmit data at the speed of light, together with the best computer systems available.

Any inconsistencies in these would mean that someone somewhere with better equipment has an edge over you. In fact, even a millisecond difference means so much that many HFT users try to locate themselves as close as possible to Wall Street to reduce transmission time of the signal waves.

All of this sounds too expensive to obtain, run and maintain. More often than not, regular people cannot afford high grade equipment to gain any significant advantage over HFT users. However, with the presence of high-end VPS providers, people have been granted the opportunity to run High Frequency Trading software without purchasing any equipment at all.

For a certain subscription fee, a premium VPS provider will provide you with a powerful virtual machine and unparalleled connection speed to install HFT software on. With many options available, you could easily find a cheap forex VPS to run your own HFT software on.


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