What is High Frequency Trading?
There are many different types of trading platforms used to process trades across many financial markets. High Frequency Trading is a specific platform that is capable of performing many trade orders, or transactions, in a very short amount of time. Computers which are used on this trading platform use complex algorithms which can analyze numerous markets and carry out orders based on the changing market conditions. Usually the traders who can trade the fastest will be the most profitable. However, there has been much debate about whether high frequency trading improves the market quality; or if it is a detriment to long term investors. Whether or not it is a beneficial sector of the market is important to those who are involved in providing financial opportunities for businesses like Efraim Landa. His company, Effi Enterprises offers counsel to businesses concerning financial matters. One of their primary concerns is helping entrepreneurs learn how to create value for their growing business and the market plays a major role in this effort.
High Frequency Trading, or HFT, is a specialized trading platform which uses computer technology to make a large number of transactions in a very short amount of time. HFT uses computerized complex algorithms which analyze many markets at the same time and executes orders based on the conditions of the market. Those traders who can execute orders at the fastest speeds usually come out more profitable than other traders who have execution speeds which are slower. Recent estimates declared that close to 50 percent of all exchange volume are from high frequency trading transactions.
HFT costs are lower, deeper and more liquid than other options. The price differences across other related markets are reduced and the prices reflect the values of stocks and commodities more accurately. The trouble is that the term “high frequency trading” has become more of a catch all phrase for many of the automated trading strategies. The term tends to lump all strategies which use computers to create, tender, monitor or revise purchases and sells of orders throughout a trading day. These types of strategies are programmed to make trading decisions based on how the decision rules developed by humans along with public information. HFT is a popular form of trading with varying types of professional traders. This includes investment banks, proprietary trading firms and investment funds. This rapid growth is due to the innovations that have occurred in trading technology along with the reforms that trading regulations have undergone which have made the markets more transparent, competitive and open.
There is a large school of thought that believes that HFT improves the overall quality of the markets. As trading has emerged to become more automated it has also become more competitive. One way that HFT improves the market is by making the market more efficient for traders who are bridging the gap between natural traders who are not all working the market all at one time. The high speed of entries helps decrease the risks of the market and becomes a beneficial tool for risk management which allows traders to revise their orders quickly by responding to changing market conditions in a real time environment. This brings more liquidity to the market since traders can offer more narrow spreads, as well as larger sized quotes which ultimately reduce costs for end users. High frequency trading is a broader type of risk management tool just like the ones marketers have used for years; but just in a faster mode due to the availability of the most accurate, up to date information available.
HFT techniques have been mostly used by professional traders such as Efraim Landa. However, even average investors can benefit from this type of trading. A long term investor who traditionally buys a mutual fund and holds it can use HFT to his benefit by using them to reduce transaction costs which are typical of the mutual fund. This allows the investor to be out less money up front and in turn end up with a greater investment return. Many mutual fund companies advise regulators that HFT can result in significant savings for mutual fund investors.