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What Is High Frequency Trading?

Computer algorithms and high-frequency trading provide the trading foundation for the majority of Wall Street investment banks, mutual funds, property businesses, and hedge funds.

Understanding high-frequency trading is essential as you venture into day trading. Let's talk more about this below.

What Is High Frequency Trading

In the world of trading, high-frequency trading (HFT) is a technique that utilizes sophisticated computer algorithms to process a huge number of orders in a fraction of a second. It employs sophisticated algorithms to keep tabs on a variety of marketplaces and place trades accordingly. often, the quickest execution rates are more lucrative than those with slower speeds.

A "black box" containing top-secret computer programs, formulae, and systems that affect the stock market may have caught your attention. For some, the thought of competing against a machine or high-frequency trading is pointless. This seems like an excuse for not putting up the effort necessary to succeed.

A day trader may say with certainty that HFT has made trading more difficult and complex. It's a source of frustration. You'll be a wreck. It's no coincidence that some of these systems are intended to target and defeat day traders.

One hand typing on a laptop with trading charts
One hand typing on a laptop with trading charts

HFT Programs

"Buy the New Low" is one of the least successful HFT systems now in use, according to some. In order to profit from the stock's downward trend, many day traders may sell short when it makes a new intraday low.

In order to force the price up, this software starts buying shorts from those day traders Short-covering by day traders is triggered as a result of this panic. The proposal seems perfect due to the almost infinite purchasing power of the companies backing HFT initiatives.

However, the scheme immediately falls apart when another huge institutional seller decides to dump their substantial assets and joins the transaction. Since both institutional sellers and day traders will continue to dump their shares on it, no matter how much the program buys, the price will not go higher.

Some High Frequency Tactics Fail

Financial institutions like Lehman Brothers (ticker: LEH, now delisted after bankruptcy), Federal Home Loan Mortgage Corp. (ticker: FRE), and numerous other mortgage holdings and investment banks all saw their stock prices plummet in September 2008, a now-classic example of how this type of HFT went wrong.

To put pressure on short-sellers, the programs sought to acquire their already broken shares, but the stock price didn't go up. On the show, day traders and large institutional investors rushed to unload their stock. When LEH and FRE, as well as other insolvent companies, were destroyed, the programs and their creators were left with vast amounts of worthless shares.

Summary

There's no need to shudder at the mere mention of high-frequency trading (HFT). Keep in mind that the market is ever-changing and dynamic. Trading strategies that are effective now may not be so in the future. As a result, HFT and algorithmic trading will never be able to take over the stock market. Real-time knowledge of the markets and price activity is essential for a successful trader.

As a result, it is difficult to program all of the factors that would remove the need for trader discretion under the current market conditions. Trading against a well-trained and disciplined trader is impossible using an algorithm. There are just too many unknowns in the financial markets.

About The Authors

Stefano Mclaughlin

Stefano Mclaughlin - For the first five years of his career, Stefano worked as a financial advisor on state and local tax matters, developing internal marketing technology for his multinational tax business. With over 12 years of experience designing high-performance web applications and interactive interactions, Stefano is now a marketing technology specialist and founder.

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