What Does High-Frequency Trading (HFT) Mean In Crypto?

Many trading strategies in the market can bring in profits to the traders, but only a few are able to generate consistent profits. High-frequency trading or HFT, as the name implies, is a technique that traders use wherein quick and frequent trades are executed to generate small but consistent profits. In this article, we’ll take a quick look at what high-frequency trading is all about. 

What is HFT?  

High-frequency trading is all about speed. It is a method of trading that uses robust programs to execute a large number of orders in a quick manner. This type of trading uses complex algorithms to analyze multiple markets and then executing orders based on market conditions. 

According to Nasdaq, half of the stock trading volume in the U.S alone is related to HFT. HFT was initially used by foreign exchange traders, but now it is also gaining traction in the crypto space for its slew of advantages. When we look at intraday trading, the share of HFT could range between 0% and 100% at any given time.

HFT in the Crypto Market 

The crypto market is hugely volatile, and can swing wild either way – in a single day at times. In such a volatile market, high frequency crypto trading looks like a very lucrative idea. And so, most of the traders use colocation, which is the primary practice of High-Frequency Trading. Colocation is used when a trading server is placed as close to an exchange’s data center as possible. This is done in order to ensure minimum latency in data transmission.

Overall, the HFT algorithmic trading is majorly used for arbitrage and short-term trading in crypto markets. 

Features of High-Frequency Trading 

Like a lot of trader secrets, HFT is something that everyday (retail) investors don’t quite understand — due to lack of available information, and the tools/expertise required to execute HFT. Here are the key features of HFT:

  • It uses high-speed and complex programs for generating and executing trading. 
  • HFT uses concise time frames for opening and liquidating positions. 
  • Submission of multiple orders, many of which which are canceled shortly.
  • Robust strategies are able to generate consistent profits.  
  • It avoids overnight risks.  

Advantages and disadvantages of HFT 

Like any other day trading technique, HFT also has its advantages and disadvantages. Ultimately, as every person is different and unique, what suits one may or may not fit others. One might find it interesting, while the other may not. Here is an overview of the advantages and limitations of HFT. 

Advantages 

Speed: For most traders, High-Frequency Trading is chosen for its speed and automation. It doesn’t involve any human intervention to spot market opportunities and gives rise to many positions within just a few seconds or minutes.   

Accuracy: High-frequency trading uses complex mathematical processes to analyze markets and conducts the trading process. It is vital for eliminating human errors. Thus, there’s minimal risk of poor decisions caused by fear and emotions, which are often to blame for manual traders’ losses. 

Liquidity: HFT contributes to sustainable benefits to the overall market. It can help in price discovery and formation processes, even though there is a risk of price manipulation. 

Disadvantages

High risk-to-reward ratio: The risk-to-reward in HFT is higher compared to traditional trading methods. 

Prone to scams: The risk with HFT relates to the faulty algorithms where one can fall prey to scams. 

Ghost liquidity: Algorithms may also be designed to place thousands of orders and cancel them seconds later, just after triggering a short-term price increase, or cause a freak trade

How does High-Frequency Trading work? 

In high-frequency trading, there is a lot of automation involved. The computers used to handle the HFT are programmed to host sophisticated algorithms that usually track and analyze a bunch of cryptocurrencies across multiple exchanges in just seconds. The algorithms created by the trading experts are designed to detect trends and other trading triggers that other traders cannot observe, no matter how professional they are. Once the analysis is done, the program is automatically open to many positions at high speed. 

When a large institution opens a large or short position on a particular cryptocurrency, the price follows the position’s side after the trade. The algorithms used by the high-frequency traders are usually built on the price moves and to trade on the opposite side.  

High frequency crypto trading strategies 

Here are some of the most popular trading strategies that could revolutionize your HFT experience in the financial markets. 

Market making

It is one of the most tested high-frequency trading strategies. It is a financial instrument that results in market liquidity and is also greatly beneficial to the HFT. 

Statistical arbitrage

HFT can simultaneously access liquidity pools, identify the best order routing, and optimize the order execution. 

Looking onto short-term opportunities 

Most people usually refer to short-term opportunities as scalping on steroids. HFT uses computers with the processing capacity for speedy algorithmic trading to secure several orders within a second. 

Conclusion 

Even though institutional investors use high-frequency trading, it can be leveraged by everyone and various market participants. But the only thing that can keep you from falling into the pit is research. It can be a great opportunity instead of an investment if researched well and implemented.  

Latest stories

You might also like...