High Frequency Trading, or HFT is becoming a hot topic these days. High Frequency Trading is defined as an measuring the holding of a particular security in a matter of milliseconds, up to a few seconds or hours by analyzing trends in the tick by tick data in order to make buy or sell decisions.
High Frequency Trading employs complex algorithms that crunch the incoming market data. This is done in an effort to identify any shifts in the market and send out lots of orders into the markets at the bid/ask price that is presented in an effort to anticipate the market movements and thus beating the trends.
One can draw a similarity between high frequency trading used by institutional clients and forex scalping employed by retail and individual traders. The concept remains the same, which is to rely on speed of execution in order to act quickly on the market data, something which only ECN Forex brokers can provide in today’s retail forex marketplace.
High Frequency trading has some basic characteristic features that are defined below.
- Limited amount of capital that can be used
- There exists a high ratio of manual/labour intensive costs to the trading profits
- Fund raising on immediate empirical performance instead of focussing on theoretical expectations relevant to a certain type of investment style
- HFT is highly quantitative
- HFT is mostly used by institutional firms and large trading desks
- Results are highly sensitive to the processing speed
- Makes use of algorithms to analyze market data and create buy/sell opportunities
HFT is usually not suitable for the derivatives markets, or the OTC. Technical analysis makes up for a key element to the success in High Frequency Trading. Most successful traders make use of their own custom combinations of Technical analysis in order to gain an edge in the markets. The key with High Frequency Trading is to make profits often quantified in cents based on the quick market fluctuations. HFT is primarily based up on the short term movements where traders look for any short term trends so as to profit from such discrepancies before the markets correct themselves again.
High Frequency trading, which was previously used by big institutions such as Goldman Sachs came into the spotlight when news broker about a former employee of Goldman Sachs who was accused of stealing the trading secrets of Goldman Sachs’ high frequency system. Most big and independent firms make use of High Frequency trading and they make up almost 60% of the trading volume.
Regulators, especially in the US and Europe decided to clampdown on High Frequency Trading, which was made the primary suspect of the sudden, what is referred to as Flash Crash in May 2010 when the Dow plunged 700 points only to recover a while later. Various studies have been conducted with no real answer as to whether HFT techniques are harmful to the markets.
The onset of High Frequency Trading into the retail Fx industry has spurred the growth for many forex brokers such as ThinkForex to start offering low latency systems as well as Direct Market Access (DMA), for example Dukascopy which usually employ the FIX-Protocol which is known to be the most reliable way to send financial transactional messages in the market.
While HFT techniques might not be viable for an independent trader, the two main aspects that provide an almost similar environment is the speed of execution. A more refined retail version of HFT is what we know as Scalping and widely employed by retail and independent forex traders. The success with scalping directly relies on the market data and the speed of execution, which is why ECN forex brokers have started to gain more prominence in the markets today.