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How Does High-Frequency Trading Works- 4 Simple Points?

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  • How Does High-Frequency Trading Works- 4 Simple Points?

    High-frequency trading refers to automatic trading platforms used by large institutional investors, investment banks, hedge funds, and others. This computerized trading platform has the ability to execute large volumes of trades at breakneck speed.

    High-frequency trading continues to grow and affect daily movements in the market. What is high-frequency trading and why should all investors care?

    What is High-Frequency Trading?

    High-frequency trading refers to automated trading platforms like FIX API used by large institutional investors, investment banks, hedge funds, and others. This computerized trading platform has the ability to execute large volumes of trades at breakneck speed.

    The SEC does not have a formal definition of high-frequency trading, but they relate these five characteristics to high-frequency trading in a study a few years ago:

    Uses extraordinary high-speed and sophisticated programs to generate, route and execute orders.

    Use of co-location services and individual data feeds offered by exchange and others to minimize network and other latency.

    The very short time frame for establishing and liquidating positions. Submission of many orders that were canceled shortly after delivery.

    End the trading day as close as possible to a flat position (ie, do not carry a significant position, not be hedged overnight).

    There is no exact definition of high-frequency trading, but the SEC criteria listed above provide a solid framework for understanding how it works.

    After the "flash crash" on May 2010 when the market dropped 10% in a matter of minutes, the SEC instituted circuit breakers when indexes such as the S&P 500 fell at certain levels during the trading day.

    "Flash crashes" are widely associated with institutions that use high-frequency trading programs.

    How Does High-Frequency Trading Work?

    The computer used to run this trading system is programmed to use a complex algorithm to analyze a large number of shares on various exchanges. This algorithm is programmed to recognize trends and other trading triggers.

    Based on these results, this trading program sends a high volume of stock trading to the market at lightning speed. The aim is to come out in front of emerging trends seen by computers to give the institutions behind them an edge in the market.

    When a large institution, such as a pension fund or mutual fund, buys or sells a large position in a particular stock, the share price generally moves slightly up or down after trading.

    The computer algorithm used by high-frequency traders is programmed to find this price anomaly and to trade on the other side.

    For example, large-scale stock sales can lower prices, the algorithm will "buy when it goes down" and then quickly sell their positions for profit when the stock price returns to normal.

    In normal business trips during trading days, large institutional trading orders can also cause a blip on stock prices.

    This is a normal order for these institutions but given the size of their orders can cause prices to move up or down more than might be expected.

    The high-frequency trader algorithm is programmed to recognize this price anomaly, make appropriate trades (buy shares or sell short) and then close positions when prices move back to more normal levels.

    What are the Benefits of High-Frequency Trading?

    Many experts feel that the high-frequency trading program is detrimental to small retail investors.

    They claim that this trading program can cause sharp movements in the market as a whole, and in individual stock prices based on the momentum caused by this trading program.

    The main beneficiaries of these programs appear to be the institutions that use them and the clients they serve.

    High-frequency trading is controversial and there are various opinions about whether it is profitable or dangerous. Many say that the arrival of high-frequency trading has increased market liquidity and helped narrow the bid-ask spread on a number of shares.

    Attempting to add costs to high-frequency trading activities results in greater bid-ask spreads, so there is something to this.

    The narrowing of the bid-ask spread is largely a factor in large-cap stocks. This also impacts many ETFs, making trading this vehicle more efficient as well.

    High-Frequency Trading Risk

    There are a number of potential risks from high-frequency trading, including:

    Strengthening market risk. The algorithm that triggers high-frequency trading can serve to exacerbate trends already experienced by the market.

    If the market momentum has moved down, the trigger for a large number of high-frequency trading can exaggerate this trend which leads to a greater decline than would have been possible without this trade.

    Potential ripple effects in other markets. Given the close interaction between world stock markets and other economic sectors, something that has an impact on one market can trigger high-frequency trading in other markets which causes a domino effect on various stock markets, differences in asset classes and the economy of the US and the world as a whole.

    Adding uncertainty among investors. The high-frequency trading algorithm can be triggered for reasons that ordinary investors might not consider when making an investment.

    The uncertainty that their best analysis might be overwritten by a computer algorithm adds a degree of uncertainty to the market.

    Incorrect algorithm. Algorithms are computer programs written by humans. While this is generally done by people who are very smart, the human factor does provide room for error.

    It is possible that one of these imperfections in algorithmic programming that triggered a decline in key markets is a risk.

    Key points
    • There are a number of important things to remember about high-frequency trading:
    • High-frequency trading is computerized trading based on an algorithm that executes a high order volume in seconds.
    • High-frequency trading adds liquidity to the market and can help narrow the overall bid-ask spread.
    • Critics say that high-frequency trading gives institutional players an unfair advantage because they can trade in large blocks because of the use of this algorithm. Some of these criticisms also blame high-frequency trading for exaggerating downward market movements in situations such as "flash crashes."
    • Unless the rules change, high-frequency trading may be here to stay, it will continue to be a factor in the market in a sustainable way.

    So, in the end, was it helpful? And if you have any topic in mind that you want me to cover for you then please let me know.
    Top 10 Tending Forex Brokers Reviews 2019

  • #2
    Does anybody there already tried this ? I for sure want to see some videos and screenshots how this program bring some money to the people out there. See my point ? It's all our live money with which we do risk to trade and that's quite big solution.