A Hft Primer

As a follow-up of my previous discussions on high frequency trading, I accept invited invitee blogger Jennifer Groton to portion alongside us a quick survey of diverse mutual HFT strategies used yesteryear equities too FX traders.

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High frequency trading strategies are nether fire.  The recent trading spike inwards our national exchanges was duly noted equally a short-circuit waiting to locomote on too drew immediate manufacture criticism of auto-trading robots. Before a witch-hunt ensues, perchance a review of the mutual HFT strategies inwards stocks too Forex is inwards order. 

High-frequency firms employ a broad diverseness of  low-margin trading strategies that are implemented yesteryear professional person marketplace position intermediaries who accept invested heavily inwards technology. These firms claim that they brand markets to a greater extent than efficient yesteryear enhancing liquidity too transparent cost regain to the create goodness of investors.  The Forex market’s unique combination of high liquidity too depression volatility instruct far an ideal environs for deploying HFT strategies, although many of the ideas too engineering scientific discipline are from the equity markets.  The basic strategies autumn into 3 categories: market-making, trending or predictive, too classic arbitrage.

Market-making strategies tend to focus on a unmarried stock or currency pair.  Many firms inwards this expanse accept been described equally engaging inwards "rebate-capture trading", a reference to the credits that firms instruct for providing liquidity on near marketplace position centers.

The instant grouping consists of mean-reversion too trending strategies. These utilize technical indicators for stocks or forex indicators for currencies, too essay to generate to a greater extent than provide from private trades.

The terminal grouping may ask a cross-section of trades from multiple markets.  The classic arbitrage strategy is a shape of the “carry trade” that uses the prices of a domestic bond, a bond denominated inwards a unusual currency, the spot cost of the currency, too the cost of a frontward contract on the currency.  If the marketplace position prices are sufficiently dissimilar from those implied inwards the model to encompass transactions costs, hence iv transactions tin hold upwards made to guarantee a risk-free profit.

High frequency trading is attributed alongside generating over 70% of the book of trades on our equity markets.  Similar statistics are non available for forex markets, precisely speculating disguised equally commercially necessary trades accept been reported to hold upwards over two-thirds of the volume.  Liquidity too pricing transparency are the benefits offered yesteryear its advocates, precisely regulators too other marketplace position participants who disagree alongside this positive assessment are shortly discounting these benefits.  Transaction taxes too fourth dimension limits on orders accept been proposed to mitigate the perceived direct a opportunity created yesteryear HFT firms, precisely the wheels of Washington motility slowly, fifty-fifty inwards crisis.  For the fourth dimension being, at that topographic point is no indication that their participation volition hold upwards discontinued.