High frequency trading (HFT) is a relatively new phenomenon that has changed the way financial securities are traded. Its exponential growth in recent years has attracted a lot of attention and many questions.
What is high frequency trading?
High frequency trading is a type of automated trading that uses algorithms to trade financial securities at very high speeds. The algorithms are executed by specialized computers that are able to analyze huge amounts of data in real time and make transactions in a fraction of a second.
Why is it so popular?
HFT has become popular because it is able to make profits by exploiting small price differences in financial securities. The algorithms are able to detect these differences and make transactions in a fraction of a second, before other traders have the chance to do so. In addition, HFT has allowed for greater efficiency in the financial market. Thanks to its speed, HFT is able to provide liquidity to the markets and reduce transaction costs. According to a research by Aite Group, HFT represented about 73% of the total trading volume on US financial markets in 2019.
Regulation of HFT is a highly discussed topic
Many regulators believe that HFT should be regulated to ensure the stability of financial markets and protect investors. However, others argue that regulating HFT could limit market efficiency. Many market operators use HFT as a form of arbitrage. Arbitrage involves buying a financial security in one market at a lower price and selling it in another market at a higher price, exploiting price differences between the two markets.
HFT has also been used in other markets, such as the cryptocurrency market. However, the cryptocurrency market is still relatively young and developing, and HFT could have an even more significant impact on this market.
Overall, high frequency trading is a phenomenon that continues to generate debate among market operators and regulators. However, it is consolidating as an advanced trading form that has the potential to improve market efficiency and reduce transaction costs.