High Frequency Trading

High Frequency Trading

Jiawei Lu

High frequency trading (HFT) is a kind of algorithmic trading with state-of-art facility and computer algorithms, taking up more than half of equity orders volumes in US.

Literally, HFT is featured by short portfolio holding periods, narrow bid-ask spreads in profit and quotes for large size, employed to capture market timing and opportunities. Quantitative models enable traders to process large volumes of information, supporting their decision to revise buy and sell orders. Strategies that HFT usually deploys are automated liquidity provision, market microstructure trading, event trading and deviations arbitrage.

With the HFT thrown into spotlight, more and more traditional trading firms tend to be automated. It turned out that HFT strategies could help to achieve profits from chaos.

High-speed order entry HFT owns makes it possible to revise orders timely in microseconds, responding to ever changing market information. Sudden and unusual price swings can be fully utilized to raise investors’ return rate. In terms of this characteristic, HFT can create unusual opportunities for investors to buy or sell at best market timing

Besides the higher return rate than traditional investment, HFT also brings opportunity to market revolution and improvement. On the one hand, it can improve market liquidity and refine fewer discrepancies across related markets by bridging the gap between longs side and short side. On the other hand, it can also reduce trading costs and make stock prices more efficient.

What’s more, HFT strategies and trading systems can be executed all day long, especially for global foreign exchange trading. Trades, with adequate supervision, can deal their transaction.

Along with the advantage HFT has and opportunities HFT provides, we face challenges HFT brings about as well.

First, HFT is meant to deal with huge amounts of data, which calls for adequate methodologies and tools. As a result, solid and credible trading systems with back testing for several years are a must.

Second, the signal conveying should be guaranteed to be precise and correct. It is speed that brings systematic trading strategies to where they are today, but it can also cause huge loss when flaws exist in this process. To this extent, the challenges we facing are advanced skills in software development and continuous hardware upgrade.