27 October 2021
High-Frequency Trading - HFT
High-Frequency Trading is a method to utilize strategies in order to top the competition that involves tools such as specialized software and algorithms, internet access of low latency, updated and detailed data of the market, supercomputing and high-end computers.
It is benefited by the traders consisting of a system High-Frequency Trading also known as the HFT that conducts multiple trades per second or in a fraction of a second through the software and algorithms. The algorithm involves studies and analyses of the market, sorts the opportunities and acts or executes upon it as per the set of predetermined parameters. The strategies, methods, and techniques that are utilized for HFT consist of various factors such as market-making, pinging, colocation, arbitrage, and new-based trading, these factors has its own benefits and its availability is dependent on the condition of the market while there is also a debate about its ethical state in the traditional market as few of the strategies are either illegal or is strictly regulated but even with the Cryptocurrency market, people should make sure that is updated and knowledge about the methods they choose for every aspect such as while investing or crypto trading.
HFT is stated to make an approximate volume of 80% in various asset markets and now given the fact of being noticed by the institutional investors, it is being also utilized for the decentralized assets.
As per CoinDesk,
“Colocation allows investors to execute trades up to a hundred times faster, giving them an edge over the rest of the market.”
The Pros and Cons of High-Frequency Trading
People who are not involved with high-frequency trading feel that it is an unfair practice but the ones involved think otherwise.
The nature of the HFT is its speeding trade which might cause sell-off in a fraction of time causing volatility, flash crashes, unevenness, price variation and risk in the crypto market.
The Wall Street Journal had reported in the year 2011, “Research has shown that algorithmic trading broadly makes price less volatile and reduces the overall cost of trading. But the capacity of the high-frequency-trading firms to buy and sell large amounts of securities in fractions of a second has raised fears that ordinary investors are being left in the dust.”
HFT also adds to the crypto market for benefits such as liquidity, speed, efficiency, stability, price discovery, narrowing of the bid, latency arbitrage, money-making and so forth.
It is a common rule of any trading, if you want to be in the leading race, you need to use the ways to get that! And since cryptocurrency is seen on the edge, it has outperformed many other forms of the investments. However, even if it is highly beneficial it thus affects the one who does not has the resources to attain High-Frequency Trading.
Matt Trudeau, the Chief Product & Strategy Officer of ErisX, said
“This phenomenon has occurred in other asset classes as trading has become more electronic and more automated. Market makers and arbitrageurs are able to trade more efficiently, which improves price formation, price discovery and liquidity. Arbitrage opportunities may become fewer and more fleeting, which is a sign of a more efficient and maturing market.”
Companies offering HFT for cryptocurrency
Various companies are providing the service of High-Frequency Trading such as the Cumberland Mining which is based in Chicago. The other companies that are involved are DV Trading, Jump Trading, Hehmeyer Trading and so forth.
Many companies execute more than 800,000 high-frequency trades a day by utilizing their services.
High-frequency trading has been a practice in the traditional market for a very long time but while choosing any method or medium for its execution for cryptocurrency, it is very important to have in-detailed research, study and analyzes before acting, also considering the factor that the world of cryptocurrency is different than the other currency concept and is unregulated. The most important part to realize is that these are all the tools or services being made to make the process easy, but at the end of it all, the human touch from choosing the tool to acting upon it itself makes the difference!