High-frequency trading is a trading platform which uses intoxicating computers to carry out numerous orders in whiz-bang speeds. It uses intricate computer algorithms, also known as algobots, to peruse multiple markets and perform requests based on market conditions. Generally, the traders with the quickest performance speeds are more profitable than the ones with moderate performance speeds.
For as long as traders have been trading stocks, intermediaries have been there to take a cut of the operation. This cut has reduced as markets have enlarged and further technological advancements. Today, there have emerged new types of mediators that don’t work at stocks exchanges and neither in banks but in hedge funds and trade in very fast. They are called high- frequency traders and they use algobots.
Among the demerits of using HFTs include:
1. They Take Market and Not Creating Market
Every time you try to buy stock from a forex trader, you can only get a portion of what you were to receive for your money. You could get all the stocks you saw at one particular exchange, but you have to pay more in all the other exchanges. This is because you are being front-run by the HFTers. They work in conjunction with both public and private exchanges paying them to see their approaching orders.
That’s why you saw all the orders at the exchange closest to you filled, and that is where fibre optic cables lie. The HFTers can notice your incoming requests at the first exchange and hence race up to buy all the other stocks you wanted everywhere else. They do this to sell to you at a higher price. This happens every time a trader tries to purchase stocks. HFTers are not connecting buyers and sellers they are instead jumping in between as middlemen. That’s not making markets more productive; it is cheating.
2. Waste of Money and Talent
High-frequency traders are pointless. It benefits only persons. There is no medal finishing second because HFTers tactic depends on not only being quicker than ordinary investors but being quicker than each other too.
3. No-one Wants To Lose To a Robot
When the market displayed on your screens become illusional, you become less willing to take the risk in that market that is providing liquidity. High-frequency traders have cowed other forex traders as nobody wants to play a losing game. This includes HFT funds themselves. The algobots are battling each other now. They have even brought their fights out of trades to spoofing in a bid to draw each other out. HFTs change their strategies when engaging with each other this way, which results in less liquidity and more instability on each trading day.
Merits of Using High-frequency Traders
It all revolves around the question of diminishing returns. It is not advisable for a forex trader to spend a lot of money on anyone other than HFT when trading on stocks. It will bring unnoticeable improvements especially estimated to what you could have spent engaging HFTs.
HFT has removed the bid-ask increase that previously would have been too small. It was experimented by adding fees on high-frequency traders; this resulted in rapid bid-ask spreads.