High-frequency trading (HFT) is an intriguing and controversial technological development. It is on the brink of the next leap forward with quantum computing enabling transaction speeds previously thought impossible. HFT trading strategies can provide significant profit potential, but only with the proper hardware and software. This article will introduce you to HFT, cover the primary HFT trading strategies, and note the regulatory challenges to give you an idea of whether HFT is a venture you should pursue.
Top Forex Brokers
Top-Rated High-Frequency Trading Strategies
HFT trading strategies form the trading backbone for some of the most dominant market participants. The best high-frequency trading platforms can provide liquidity, act as market makers, use momentum trading and engage in arbitrage trading.
The top-rated HFT trading strategies are:
HFT trading strategies are not easily accessible to retail traders. However, they can learn from the momentum trading of HFT firms and model their approach accordingly, so long as they can code the necessary algorithms. Scalping is the closest momentum trading strategy retail traders can mirror from the HFT trading strategies but at a much smaller scale. While HFT firms place millions of orders per second, retail scalpers can transact dozens of orders.
What Are High-Frequency Trading (HFT) Firms?
HFT firms require competent computers or computer clusters, advanced algorithms, machine learning components, artificial intelligence, and co-location to exchange servers to generate profits in milliseconds amid an ultra-competitive landscape and against evolving technological and regulatory requirements. The HFT trading strategies are proprietary solutions providing a micro-edge over competitors.
HFT firms profit from micro-movements in price action and place millions of traders per second at a speed inconceivable by the human mind. They hold trades for fractions of a second and can add liquidity by trading the bid-ask spread, placing buy and sell orders simultaneously in the same asset. Most HFT firms trade equities, as necessary anomalies are more frequent and last longer than in the Forex market.
How High-Frequency Trading (HFT) Firms Work
HFT firms are often proprietary trading firms using internal capital, technology, and development to create HFT trading strategies. They place millions of orders per second and may use tactics including sniffing, pinging, and sniping to test momentum behavior before placing their trades. HFT firms also use arbitrage trading, provide liquidity, and act as market makers. HFT firms are responsible for an estimated 50% of trading volume in the US and up to 43% in Europe.
The Three Primary Types of HFT Firm
- Proprietary trading firms
- Subsidiaries of broker-dealers
- Quantitative hedge funds
Some of the Most Notable HFT Firms
- Citadel Securities
- Virtu Americas
- G1 Execution Services
- Two Sigma Securities
- Wolverine Securities
- Jane Street Capital
- UBS Securities
- Goldman Sachs & Co.
- Tradebot Systems Inc.
- Jump Trading
- Five Rings Capital LLC
- Allston Trading LLC
- Geneva Trading
- Chopper Trading
- DRW Holdings LLC
- Susquehanna International Group LLP (SIG)
- Hudson River Trading (HRT)
What Is a High Frequency Trading Strategy?
HFT trading strategies are the strategies HFT firms use to generate profits. Variants of momentum and arbitrage trading account for most HFT trading strategies, which each HFT firm develops in-house and guards at all costs, as it represents their primary competitive edge, followed by their technological infrastructure and collocation.
Strategy Types
Below is a snapshot of three HFT trading strategies.
Market Making
- Liquidity provision
- Rebate-driven strategies
- Quote matching
High-Frequency Momentum Trading
- Short-term momentum
- Sniffing, pinging, and sniping
- Spread capturing
High-Speed Trading Platforms
- Direct market access
- Minimal latency
- Maximizing trade efficiency
Regulatory Challenges
HFT firms face an evolving regulatory framework to ensure market fairness, and pending regulatory changes and proposals could decrease the competitive edge of HFT trading strategies. One example is the SEC proposal to enforce auctions before executing retail orders. It would increase trading costs and slow down trading speed. Regulatory changes pose a significant and potentially existential threat to HFT firms.
HFT Trading Strategies – Pros and Cons
Traders should consider the pros and cons of HFT trading strategies to understand them better.
The Pros of HFT Trading Strategies
- Vast trading opportunities
- High-speed trading
- Liquidity injections that can create more efficient trading conditions for other market participants
The Cons of HFT Trading Strategies
- Increased volatility
- Less profitable during higher market volatility
- Ability to trigger market crashes due to hardware or software errors
- Few market participants can engage in HFT trading and may control short-term directional trades
Bottom Line
HFT firms develop HFT trading strategies in-house, and the advancement of machine learning, AI trading software, and quantum computing will usher in the next leap forward in HFT trading. Despite their controversial practices and potentially existential regulatory threats, HFT firms inject much-needed liquidity and can create more efficient trading conditions for other market participants. HFT trading strategies are generally inaccessible to retail traders, except for momentum trading. Retail traders may adapt by following the HFT approach on a micro-scale.
