BAJAJ BROKING
High frequency trading is a type of trading in which powerful computers are utilised to execute large volumes of trades in a very short time frame. In high frequency trading, algorithms play a critical role in initiating transactions once the market hits the predefined parameters. In this article, we shall discuss the concept of high-frequency trading, its pros and cons, and key strategies.
Technology is constantly transforming the way we approach various processes, and stock trading is no exception. With the switch to electronic trading, the process has become swifter, more transparent, and cost-effective. Amongst the latest technological disruption in stock trading is high-frequency trading. In this article, we shall discuss
High frequency trading is a variant of stock trading that is characterised by high speed execution of a large number of transactions. This type of trading revolves around extremely powerful computers and low latency networks that leverage processing and transmitting speed to facilitate swift and high volume trading. Hft trading is algorithm driven and requires significant infrastructure - mechanical and human capital wise. As such, this trading methodology is largely deployed only by institutional investors and large fund houses.
At the foundation of high frequency trading are complex algorithms designed to trigger huge volumes of transactions in response to the market reaching certain levels on predefined parameters. In high frequency trading, individual securities are consistently assessed to detect even the most minute of trends and benefit from it through high-speed and bulk transactions.
Although the changes that trigger such trades may be minute and seemingly insignificant, the sheer volume of transactions in high frequency trading amplifies the overall profit. To make high frequency trading possible, substantial investment in technological infrastructure is a prerequisite.
There are several reasons why high-frequency trading has been gaining traction. Here are the major benefits of high frequency trading:
High frequency trading has its fair share of disadvantages, risks, and ethical predicaments. Firstly, the time horizon for high frequency trades is minimal and the corresponding trade volume is high, a combination which is construed to increase market volatility. Secondly, the requirement of extremely expensive technology and network resources makes the scope of high frequency trading limited to large fund houses and financial institutions, thereby tilting the scale of the markets unfairly in their favour.
Thirdly, there are widespread ethical dilemmas surrounding high frequency trading. The argument that high frequency trading results in ghost liquidity or extremely short-lived liquidity that can only be tapped by high frequency trading platforms and not by other investors makes the methodology a moral grey area. Furthermore, high frequency trading has been found to result in market instability and crashes in several instances. This is exacerbated by the incidents of high frequency traders manipulating the market.
The methodology of high frequency trading revolves around certain trading strategies which facilitate the identification of price movements within and across stock exchanges. Here are some of the prominent strategies of high frequency trading:
Although high frequency trading enables the execution of large volumes of transactions in an automated manner, it is a subject of constant debate and disagreement between various stakeholders in the market. The ethical predicaments associated with high frequency trading as well as the substantial capital investment required to operationalise it make its scope significantly limited.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
For All Disclaimers Click Here: https://bit.ly/3Tcsfuc
Share this article:
India’s Alcoholic Beverage Exports to Grow 20% in 2024-25
18 Oct, 2024 | 2 Min. read
Share Market Today | Gift Nifty Indicates Flat Opening, Consolidation Likely
18 Oct, 2024 | 4 Min. read
Zomato and Zepto Plan New Fundraising Through QIP
18 Oct, 2024 | 2 Min. read
IGL and MGL Share Price Hit After APM Gas Allocation Cut
18 Oct, 2024 | 2 Min. read
Tech Mahindra Q2 Results FY24-25 Preview | Estimate
18 Oct, 2024 | 1 Min. read
India-UK Free Trade Agreement Talks to Resume in November
18 Oct, 2024 | 2 Min. read
Commodities Market Today | WTI Crude Rises to $70.75, Gold Gains, Silver Falls
18 Oct, 2024 | 1 Min. read
Gold Rate Today | Gold Rises 0.6%, Silver Drops 0.3% in Latest Trading
18 Oct, 2024 | 2 Min. read
PC Jeweller Q2 Results FY24-25 Preview | Estimate
18 Oct, 2024 | 1 Min. read
Tata Communications Q2 Results FY24-25 Highlights
17 Oct, 2024 | 2 Min. read
Havells India Q2 Results FY24-25 Highlights, Revenue and Profit Surge
17 Oct, 2024 | 2 Min. read
Polycab Q2 Results FY24-25 Highlights
17 Oct, 2024 | 2 Min. read
RBI Launches ULI: Transforming Loan Access
August 27, 2024 | 4 Min. read
Textile Sector in India
September 20, 2024 | 5 Min. read
List of IPOs with DRHPs Filed
November 30, 2023 | 3 Min. read
Aditya Birla Group
September 28, 2023 | 10 Min. read
Bajaj Housing Finance Ltd IPO: Things Smart Investors Need to Know
September 05, 2024 | 4 Min. read
Budget Stock Ideas 2024-2025 | Stocks to Buy Today
July 24, 2024 | 4 Min. read
IPO Eligibility Criteria : Full Details
March 15, 2024 | 6 Min. read
What Is the Lock-In Period in IPOs?
October 18, 2023 | 6 Min. read
Godfrey Phillips Announces 2:1 Bonus Shares
September 16, 2024 | 7 Min. read
Jindal Group- A Comprehensive Analysis
September 27, 2024 | 7 Min. read
Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading