What is High-Frequency Trading, and why isn’t it illegal?

Life does not go without changing. Everything develops, becomes complicated, and every day we discover things and innovations, which was unknown previously. It goes to trading as well. Time had passed back in the past when trading was strictly manual, and only traders could carry out any operations with their actions. But now, High-Frequency Trading (HFT) is coming to the rescue of stock market participants and not only. According to Bitcoin Evolution, HFT is slowly but surely finding its place among the crypto trading community as well, despite its non-proximity to centralized exchanges. This article will tell what it is, how it works, and why is not it illegal.

How is high-frequency trading on the exchange?

This is trading, which involves the use of trading algorithms that allow you to perform operations in the stock market very quickly. In fact, this is such software that runs on computers with high computing ability and requires the most efficient communication with trading floors.

There are several features of such trading:

• orders are placed, changed and liquidated superfast – up to five milliseconds
• the process of making trading decisions is automated
• colocation services are used that provide direct access to exchanges
• high daily turns are provided
• more trading operations are carried out
• the trading day closes without positions.

There are two ways to generate income. The first is maintaining liquidity for a reward from the exchange. The second is participation in arbitration, that is, the resale of interrelated assets at different sites when finding favourable deviations in their price. In general, there are many strategies for using such algorithms (news arbitrage, market-making, speculation with spreads, etc.).

Trade orders of other exchange participants can be seen in a special glass of prices, as well as in the order ribbon. Considering that the opening and closing of these transactions is a swift and continuous process, it is the HFT algorithms that are responsible for its implementation.

All work is based on access to the Internet. With HFT technology, traders can get information about open orders earlier than ordinary players. And, of course, this makes them a considerable advantage over others. That is why one of the important features of high-frequency trading is the use of colocation services, implying proximity to exchange servers. Communication with the exchange is very important, and HFT companies in many parts of the world compete with each other even for nanoseconds of the speed of communication with the exchange. Many well-known representatives of such trading are located in America, and even some of the largest banks that do not disclose which technologies they use are among them.
Who uses algorithmic trading?
As you can see, we are talking about serious technologies that work on high-performance equipment using advanced software. Also, HFT trading involves operating in very large amounts. Only developed investment and financial organizations can afford them. In this case, there is no need to talk about simple traders, since this area, alas, is not available to them.

There are 4 groups of HFT players:

• subsidiaries of brokers
• hedge funds
• the largest financial organizations
• prop-trading companies that work with HFT at their own expense.

Why do some people argue about its legality?

Some people believe that this sphere is a monopoly in the stock market, which requires being a member of an elite corporate caste and holding a special position. Such companies receive information about market orders an order of magnitude earlier than other players and, of course, try to use this valuable information to their competitors.

There is also a drawback, that one flawed algorithm could result in tons of losses within seconds and it also deprives human decision-making.

A lot of books has been written about high-frequency trading, and some describe that large financial institutions use to carry out transactions with their influential clients. Therefore, the HFT is often susceptible to criticism, whose supporters argue: such trading hides from ordinary players the huge profits of privileged participants. Moreover, one can hear the opinion that HFT-players encroach even on pension accumulations of the population contained in mutual funds, from the transactions of which they have huge profits. In addition, algorithms can always fail, and precedents already occurred in the near 2010, when the Dow Jones index lost almost 1,000 points in just five minutes and for no apparent reason, which is associated with the massive actions of HFT traders.

But if we talk about the advantages provided by such algorithms, it can be noted that they provide high liquidity to the market and allow to reduce the cost of trading operations, not limited to these advantages. HFT can not be banned as you can not ban derivatives market all around the globe.