What is High Frequency Trading ?
High frequency trading has become a buzz word in the recent years in the trading world. However, it is not much more than placing large number of trades in a short period of time. Of course, with a focus on high win rate. High frequency trading aims for a lot of successful trades for extremely small margins which adds up over time.
Because, traders gain between 0.2% to 0.5% profit per trade, things like exchange fees and cost of trading is highly important. However, it is important to understand the fact most HFT models win 99% of the time small and lose that 1% of the time so big that you end up in under water. Therefore, I can’t emphasize enough to perform proper position sizing and risk management.
Most people have this expectation that high frequency trading models has to be extremely complicated and complex. Yet, this is far from the truth. Yes, it does require moderate knowledge on trading, coding and mathematics. If you are reading this, you probably possess some if not all of the required skills above. Let’s explore some of the most common as well as more complex models of high frequency trading.
High frequency trading uses algorithms to analyse trading data and execute trades in fractions of a milisecond. High frequency trading platforms allow traders to fill millions of orders and scan a multitude of markets and exchanges, providing split second arbitrage opportunities for institutions to execute trades before the open market.
Servers owned by the HFT shops are located on the sites where exchange’s computers are placed. This allows HFT firms to get equity prices split seconds before the investing public, because of the discrepancy in connection speeds. Colocation is a profitable business for the exchanges, costing firms millions of dollars for the opportunity to trade with low latency ̶ the time between a signal being sent and received.
Market making is one of the most common places where high frequency traders find themselves starting this journey. Because the concept itself is easy to understand and fairly short and easy to code.
The whole idea is placing limit orders in the orderbook at a set interval for a set size while maintaining a take profit order with a small margin. The strategy benefits from a few factors. One is the rebate fee that exchanges like KuCoin pay its users. In fact, they pay 0.025% rebate for limit order. However, make sure to take funding into consideration.
Second, it eliminates the issue of timing a perfect entry and exit. Rather, trader builds a position overtime and is less prone to the volatility.
We can set intervals as short as 1 second which would result to cancel and replace the same order every 1 second regardless of order being filled or not. As you can see, an interval like 1 seconds may cause for your position’s size to get out of control fairly quickly.
On the contrary, can set the interval as one day which would result in placing one order everyday at a certain time and if it doesn’t get filled, you would have to wait for the next day to place another order. Read more for a detailed explanation of market making.
Arbitrage has become a phrase that’s used by pretty much everyone who trades. However, it does have a lot of different version and models that people don’t know about. The simple idea is that traders to capitalize on the market inefficiencies such as price discrepancy across exchanges.
For example, you can buy Bitcoin at $10,000 on exchange A and sell for $10,100 on exchange B. However, it is not that simple and easy as there are a lot of variables that would need to go in your way. There are inherit dangers like transfer time of the funds between exchanges, transfer cost and potential of price dropping below your initial entry price resulting in a loss. Read more for potential dangers.
We will dedicate an entire article for this trading style in the future and dive more in depth to it.
Triangular arbitrage is one of the more complicated examples of arbitrage and high frequency trading models yet, still simple to grasp the idea. If you thought “It is too much hustle to execute trades across exchanges and rebalance them”, you will like T-Arb very much. Here, the trader aims to capitalize on the price discrepancies within the same exchange. Let’s look at Binance for this example.
Let’s assume that you have Bitcoin, Link and USDT in your account.
You are looking at the following markets with following prices
BTC = $10,000
LINK/BTC = 0.005
LINK/USDT = 5.1$
So, if you were to buy Link in LINK/BTC market and turned around to sell it in LINK/USDT market, you would have paid 5$ worth of Bitcoin for Link and sell it for 5.1$ USDT. At this point, you can go and buy Bitcoin with USDT for 5.1$ worth, ultimately making 2% profit in this trade. Read for more details.
This is strategy is best used on KuCoin due to the fact that it has the most markets with different base pairs.
This an entry level article for high frequency trading and models. However, there are numerous quant firms that uses the trading models mentioned above with of course, few of their tweaks and safety mechanisms. We will explore more complicated and complex models in the upcoming posts.
Brokerage owners need to perceive every opportunity and threat hidden in their clients’ flow patterns and automate their own real-time responses in order to stay profitable as markets change.
There are ways in which liquidity providers can help brokerage owners.
Providers could offer extremely flexible liquidity solutions that enable them to start their operations with insignificant volumes and, over time, grow into businesses requiring high-volume transactions.
B-book brokerages are less dependent on sources of liquidity as long as the feed is clean and reliable.
It is common for FX and Crypto providers ensuring market access to their clients to react to predatory algorithms and fluctuating fill ratios. Traditional customer profiling based on purely historical data is good for strategic decision-making.
However, for more tactical decisions with immediate impact, real-time analysis is additionally required.
Liquidity provider can help, by:
mitigating ‘toxic flow’, by monitoring predatory patterns in real time;
increasing business, by detecting reductions in flow from ‘good’ clients and automatically reducing spreads for those clients; preserving client relationships, by detecting pending credit breaches and immediately calling the client.
In finance, quote stuffing refers to a form of market manipulation employed by high-frequency traders (HFT) that involves quickly entering and withdrawing a large number of orders in an attempt to flood the market. This can create confusion in the market and trading opportunities for high-speed algorithmic traders.
By quote stuffing, trading systems delay price quotes while the stuffing is occurring, simply by placing and canceling orders at a rate that substantially surpasses the bandwidth of market data feed lines.
The orders pile up in buffers, and the delay (increased latency) lasts until the buffer drains. Trading systems slow down a direct exchange feed whenever they want, and the phantom orders do not need to be in a particular asset; they can be in any of the assets that cohabit the particular price (market data) feed.
For example, phantom orders at the rate of over about 10,000 messages/second, even for fractions of a second. Exchanges profit by selling higher-capacity feeds to HFT traders, which disincents self-regulation that could prevent the quote stuffing.
Quote stuffing happens frequently – when 6,000 replacement orders for one asset are crammed into a second, each order is valid for less time than it takes for the news of the order (traveling at close to the speed of light) to reach anyone not at the exchange; no normal person can execute a trade against the phantom order.
Ultra-Low Latency Strategies
A trading strategy is only as good as the trading infrastructure used to execute it. When every millisecond counts, high-end technology is the only option. To get the best bid and ask prices and fast trade execution within milliseconds, need spent time considering which locations give us the biggest advantage in the markets.
Ultra-fast market analysis and order execution are only possible with the best algorithms powered by reliable high performance servers. Built with dual Intel® Xeon® Scalable processors, high frequency servers are specifically designed to meet all of our ultra fast processing needs to stay ahead of the high frequency trading competition. Crypto Swiss Hub.