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What is High Frequency Trading (HFTs): Risks & Rewards - YouTube
Channel: Elliott Wave Forecast
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what is high frequency trading
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if you're an average human being your
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eyes take around 400 milliseconds to
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blink once high frequency trading is a
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kind of market activity that moves in
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less than one millisecond to spot and
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take advantage of an opportunity to buy
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or sell it happens through trading
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algorithms programs that determine how
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to trade based on fast-moving market
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data
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high frequency trading also known as hft
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is a method of trading that uses
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powerful computer programs to transact a
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large number of orders in fractions of a
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second it uses complex algorithms to
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analyze multiple markets and execute
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orders based on market conditions
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typically the traders with the fastest
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execution speeds are more profitable
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than traders with slower execution
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speeds
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advantages of high frequency trading
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significant returns
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high frequency trading along with
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trading large volumes of securities
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allow traders to profit from even very
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small price fluctuations it allows
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institutions to gain significant returns
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on bid ask spreads
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more trading opportunities
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trading algorithms can scan multiple
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markets and exchanges it enables traders
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to find more trading opportunities
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including arbitraging slight price
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differences for the same asset as traded
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on different exchanges
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more efficient
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many proponents of high frequency
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trading argue that it enhances liquidity
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in the market hft clearly increases
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competition in the market as trades are
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executed faster and the volume of trade
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significantly increases the increased
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liquidity causes bid ask spreads to
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decline making the markets more price
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efficient
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risks of high frequency trading
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high risk reward ratio
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high frequency traders rarely hold their
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portfolios overnight accumulating
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minimal capital and establish holding
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for a short time frame before
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liquidating their position as a result
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the risk reward is exceptionally high
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market volatility
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decisions happen in milliseconds and
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this could result in big market moves
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without reason as an example on may 6
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2010 the dow jones industrial average
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djia suffered its largest intraday point
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drop ever declining 1 000 points and
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dropping 10 percent in just 20 minutes
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before rising again a government
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investigation blamed a massive order
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that triggered a sell-off for the crash
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source investopedia
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can be illegal
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using ping ping and spoofing strategies
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are illegal and used to manipulate the
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market
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pinging is a strategy in which the high
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frequency trader sends many small orders
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to an exchange if these orders are all
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filled instantly the high frequency
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trader can infer that on the other side
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of the trade is a big investor looking
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to move a large volume of shares the
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high frequency trader then takes this
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knowledge and uses it against the big
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investor by moving the price against him
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buying if he wants to buy and then
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selling it back to him at a higher price
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selling if he wants to sell and then
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buying it back at a lower one
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spoofing is a strategy ostensibly banned
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in 2010 in which high frequency traders
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send in orders with the idea of trying
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to confuse or spoof other traders and
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especially other trading algorithms into
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thinking that demand to buy or sell a
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stock is coming if the other traders
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fall for it the algorithm quickly
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reverses course to take the side of the
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trade it actually wanted
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source vox
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the bottom line
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algorithmic hft has a number of risks
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the biggest of which is its potential to
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amplify systemic risk its propensity to
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intensify market volatility can ripple
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across to other markets and stoke
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investor uncertainty repeated bouts of
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unusual market volatility could wind up
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eroding many investors confidence in
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market integrity
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we at elliott wave forecast use blue
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boxes which are high frequency areas and
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are based in a relationship of sequences
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cycles and calculated using extensions
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we refer to them as high frequency
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training areas mainly because of blue
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boxes majority of the times both buyers
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and sellers agree in direction of the
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next move for three swings at least and
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hence why they present high probability
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and low risk opportunities to enter the
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market in the direction of the trend
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you
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