What are the strategies for high-frequency trading? Advantages and disadvantages of high-frequency trading

Dec 15,2022
What are the strategies for high-frequency trading? Advantages and disadvantages of high-frequency trading

Previously, I have shared with you what high-frequency trading is. In order to quickly seize short-term market opportunities, high-frequency traders depend on powerful computer software that can quickly scan the market. In addition, high-frequency trading platforms can not only detect arbitrage opportunities, but also make trading hundreds of times faster than people traders.

2. Market maker

Another common high-frequency trading strategy is market making. This involves simultaneously issuing securities trading orders and profiting from the bid ask spread - the difference between the price you are willing to pay for the property (offer) and the price you are willing to pay to sell it (auction).

Large companies, known as market makers, provide liquidity and good order in the market, and are well known for regular trading. Market makers can also connect to digital currency exchanges to ensure market quality. On the other hand, there are also market makers who have no agreement with the trading platform - their purpose is to apply their algorithm and profit from the spread.

Market makers continue to trade digital currencies and set bid ask spreads so that they can make small profits in each transaction. For example, they may purchase Bitcoin from people who want to sell their Bitcoin assets at a price of $37100 (asking price) and sell it at a price of $37102 (buying price).

The difference of $2.00 between the bid price and the offer price is called the point difference, which is usually the way for market makers to make money. Moreover, although the difference between the selling price and the buying price may seem insignificant, the intraday trading volume may lead to substantial profits.

The price difference guarantees that market makers can compensate for the inheritance risk along with such transactions. Market makers provide liquidity for the market, making it easier for both parties to trade at a fair price.

3. Short term opportunities

High frequency trading is not suitable for band traders and buy holders. Instead, it is used by speculators who want to bet on short-term price adjustments. As a result, high-frequency traders move so fast that prices may not have time to adjust before they move again.

For example, when whales sell digital currencies, their prices usually fall briefly before the market adjusts to meet the balance between supply and demand. Most manual traders will fail in this fall, because they may only continue for a few minutes (or even seconds), but high-frequency traders can use it. They have time to let their algorithms work because they know that the market will eventually stabilize.

4. Batch transaction

Another common high-frequency trading strategy is batch trading. This involves tracking the number of shares traded during a given period, followed by a certain amount of trading. The logic behind this is that with the increase of the number of stocks traded, the market liquidity will also increase, and it will be easier to trade a large number of individual stocks without too much impact on the market.

In short, trading volume is through market liquidity.

High frequency trading allows traders to quickly carry out a large number of transactions, and even the smallest market fluctuations can make profits.

Advantages and disadvantages of high-frequency trading


1. Transaction speed and automation

You do not have to open and close the transaction yourself. Instead, the entire process is automated, making your transactions more efficient. The algorithm gives you all the work; That way, you can ensure that higher efficiency and zero mentality affect your trading.

2. Efficient in liquid and illiquid markets

High frequency trading is a feasible way to conduct trading in the liquid and non liquid markets. This is because the whole transaction generally takes place almost immediately, and there is no need for high market liquidity. In addition, it allows customers to use price changes before they appear completely in the order book.

3. Provide market liquidity

High frequency trading can improve the market situation, because it usually involves many transactions. It also provides the market with continuous liquidity, which is conducive to maintaining tight purchase prices and purchase prices.


1. High loss is possible

The game relies heavily on algorithms. Unfortunately, these algorithms are only as good as their creators. Therefore, if there is any mistake in its composition, you may lose a lot of money or the entire transaction balance.

2. Deception: Ghost Mobility

The liquidity provided by the trading method is controversial because it will fade away quickly. The trading time of high-frequency trading is very short, so many traders may not be able to use it. Therefore, it can be concluded that the liquidity provided by high-frequency trading is not so effective for the market.

Can retail investors participate in high-frequency trading?

High frequency trading must be close to the trading frequency even in the period of large market participants, which makes daily traders unable to carry out trading. The algorithm requirements are very high. Implementing transactions requires you to have a powerful computer to analyze and execute large transactions in seconds.

Only a few traders have the resources to purchase high-tech systems that can make trading styles work. This does not mean that retail traders cannot participate in any form of algorithmic trading - intraday traders can get many automatic trading countermeasures through price. Some automatic trading robots have also been created to facilitate the operation of correct HFT trading strategies, but the differences are still obvious.

Speaking of this, I believe you have a certain understanding of high-frequency trading strategies, as well as the advantages and disadvantages of high-frequency trading. In general, Xiaobian also reminds investors that no matter whether they want to invest in cryptocurrency or not, they must have a comprehensive understanding before entering the market. After all, investment is accompanied by certain risks, so don't invest blindly.