Countering High Frequency Trading (HFT)

Countering High Frequency Trading (HFT)

Trading pros can tweak their process to cope with HFT and enjoy the benefits of trading technology.

A recent study by TABB Group suggests that high frequency trading programs have accounted for more than 50 percent of volume in the U.S. equity market.

Although some investors appreciate HFT’s for adding substantial liquidity to the market while at the same time narrowing spreads, which benefits institutional investors, the black box-like trading strategies engaged by high frequency traders remains a myth to asset managers, often raising concerns with traditional buy-side investors due to lack of transparency.

Despite the HFT hype, portfolio managers are still in an important position and can simply refine their investment process to cope with their HFT counterparts while still enjoying the benefits brought about by these high frequency trading technology. Countering High Frequency Trading

The HFT Phenomena

Countering High Frequency Trading
HFT (High frequency trading) uses high powered computers and high speed networks to seek profit from detecting liquidity and searching out statistical arbitrage. Yet, while facilitating market liquidity, these actions sometimes come at the cost of market impact to institutional investors. As institutions and large block traders execute urgent trades in the market, they can cause drastic supply and demand imbalances.

High speed liquidity traders copy the role of market makers by passively posting bids and offers. They profit from the spread, which accounts for the temporary market impact paid by the large orders as a liquidity premium.

Countering High Frequency TradingĀ  Meanwhile, it costs a significant amount of permanent market impact when the trade is composed of block orders and participates in the market for a perceivable time. This is due to information leakage sniffed out by the markets mainly dominated by HFT participants.

About the Author

Pete is a full-time trader and mentor since 2000. Author of Equity Trader 101 and the Order Flow Method. He is dedicated to help self-directed traders to bust through the six-figure level.

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