High Frequency Trading: Types of HFT, Impact of HFT on retail investors


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High Frequency Trading is one of the specialized techniques of algorithmic trading. As per the Securities and Exchanges Commission of the United States High Frequency Trading includes the following:

  • Making use of very sophisticated and high-speed computer system programs for creating, routing, and performing orders
  • Making use of private information feeds from exchanges as well as co-located servers in order to decrease network and other types of latencies.
  • Maintaining extremely short timeframes for establishing and liquidating positions, leading to the frequent turnover of lots of little positions in one or more financial instruments
  • Sending a variety of orders that are cancelled soon after submission
  • Maintaining really couple of, if any, over night positions.

Material in this Short Article.

Kinds Of High Frequency Trading (HFT):

1. Exclusive trading companies:

These are the firms which take part in high regular trading using their own cash. The risks and benefits are shared by the partners of the company. Much of these companies serve as market makers; generating and performing buy and offer orders automatically throughout the day

2. Subsidiary firms:

These kinds of high frequency trading firms are actually the subsidiaries of the brokerage firms. They designate a separate desk for high frequency trading.

3. Hedge funds:

These High regular trading firms whose primary focus is to make earnings using strategic arbitrage. They make the income out of the cost disparities across securities and other possession classes

High Frequency Trading

How do High Frequency Traders make earnings?

1. Market making:

High Frequency Trading includes market making i.e. they position the buy order as well as the sell order with a rate band that involves thoroughly calculated spread. Buy order is put at a cost slightly lower than the existing rate whereas the sell orders are positioned at prices that are a little greater than the existing rate. These purchase and sell orders are performed at very amazing speed by the advanced computers utilizing complicated programs. This way, the big deals involving the minuscule spread will eventually result in substantial revenues to the High Frequency Trading companies.

2. Paid by stock market and ECNs:

In the nations like United States and UK where High Frequency Trading types part of substantial share of the total market deals, High Frequency Trading companies are paid by some stock exchanges, electronic interaction network (ECN) that help with the trading of monetary products outside stock market for offering the liquidity

3. Arbitrage:

High Frequency Trading firms earn money out of the cost inconsistencies between securities on various exchanges or different property groups in the market. This method is widely called as arbitrage in the monetary world.

Effect of HFT on retail investors:

Numerous research studies that were carried out in the United States have exposed that HFT traders make more money when they carry out the orders with retail investors. Further, the retail financiers will go with the synthetic demand and supply that are controlled by the HFT who place the buy and sell orders simply to get out of the spread.

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