When it comes to crypto trading, too many concepts and strategies exist. And almost every day, you get to hear about a new term. One such term is high frequency trading. So in case if you have been wondering what it is, then I have got your back.
High frequency trading is one of the popular and said to be profitable strategies for crypto traders. However, it is not a perfect strategy that might work for everyone out there.
In this article, my goal would be to explain everything about it. So you can get a clear idea about what high frequency trading is and if you should follow it. So let’s jump into the topic right away:
What is High Frequency Trading in the Crypto Market?
High frequency trading is also known as HFT, and it represents speed. This trading method requires various algorithms to analyze the smallest price changes and discrepancies between the same asset price on multiple exchanges.
High frequency trading platforms are capable of automatically opening and closing several positions per second. The main goal behind this trading method is to focus on the short term goals which would go unnoticed by the naked eye.
The trading method can be applied in different financial markets like foreign exchange or forex, stock, and other markets. However, over a period of time high frequency trading has become the trader’s favorite strategy. As the crypto market is extremely volatile, and traders don’t want to miss out on opportunities.
Also, on the internet, you will find services that are specialized in high frequency trading and offer you such services. However, as a trader, you should not trust all the platforms or services blindly. As it could lead to potential loss or scam. Even most of the high frequency trading platforms don’t work at all.
How Does High-Frequency Trading Work?
High frequency trading requires automation. As it would be hard for the traders to spot every opportunity in the market. Also, automation is not something that every trader is comfortable using.
In high frequency trading, computers use sophisticated algorithms which continuously analyze the market across multiple exchanges within a millisecond.
These algorithms are created by trading experts, and they are designed to detect the smallest trends in the market. And figure out opportunities that other traders cannot find out.
Based on their analysis done by the algorithms, the traders then automatically open a large number of positions at high speed. In this case, the main aim is to be the first to benefit from the emerging trends detected by the algorithms.
Moreover, when a large institution or whale opens a large long or short position on a particular cryptocurrency, the price tends to follow the side of the position after the trade.
Key Aspects of High Frequency Trading
There is no clear definition of high frequency trading. Instead, you can explain high frequency trading through five key aspects. These aspects are:
- High frequency trading involves complex programs for generating and executing orders at a higher speed.
- In HFT, the algorithms use a shorter time frame for opening and liquidating positions.
- Submission of multiple orders that gets canceled shortly after submission.
- Use of collocation services offered by exchanges and other services to reduce potential delays and latencies in HFT.
- Avoiding overnight risk.
Without any doubt, high frequency trading is an integral part of any market, including the crypto market. However, most retail traders are not aware of what HFT is and it’s a contribution in the market. And traders who prefer to make more profit without putting much effort are more interested in high frequency trading.
However, the HFT strategy is not for everyone. It highly depends on the algorithms and the equipment used. Unfortunately, retail investors don’t really get access to these algorithms. As building them can be costly and. Hence, they are mostly preferred by institutional investors who have the resources to build the algorithm that works for them.
The algorithms used by the high frequency traders are built to scour these price moves and to trade on the opposite side.
Is HFT Applicable to Crypto Trading?
Yes, HFT is applicable to the crypto market. However, not every trader can execute it. High frequency trading is similar to what we get to see in the traditional markets.
However, the crypto space is extremely volatile. As a result, it offers more opportunities but comes with higher risks.
One of the basic high frequency trading practices that we get to see in the crypto market is known as collocation. Collocation is used when a trading service is placed as close to an exchange’s data center as possible.
The server is usually located in the same facility as the exchange. This ensures that the trading server enjoys minimum latency in data transmission. As a slight delay in data transmission can turn the tables around.
Because of the low data transmission rate, the institutional investors get to execute or cancel their orders almost instantly.
However, apart from collocation, high frequency trading algorithms are commonly used for arbitrage and short term trading in the crypto market.
Difference Between HFT And Algorithmic Trading
You might be thinking that HFT and algorithm trading is pretty much the same thing, but it is not. Both of them have a lot of complexities.
On one side, we have automated or algorithm trading also known as algo trading or black box trading. These trading solutions cones of a collection of algorithms and execution methodologies to automatically place orders in the market or exchange after a technical analysis.
Also, these pre-programmed algorithms’ trading instructions are used for trading a set of established parameters like the market price, time, volume, and other data.
Algorithm trading sends small order types within a certain period of time. It basically divides large trades into smaller ones for a profitable outcome.
On the other hand, the high frequency trading solution handles small scale trade orders and sends them to a market or exchange at a high rate of speed. When it comes to trading, HFT acts as a market creator as it works at a pretty high speed.
High frequency trading strategies have been known for their ability to trade quickly. They cannot only create a new market for institutional investors. Also, they can spot little opportunities in the market which go unnoticed by the retail investors. As a result, institutional investors get to make money.
So that was all for what is high frequency trading in the crypto market. I hope this has given you enough insides into how HFT works and other details. In case if you have any more questions to ask, then do feel free to drop a comment below.