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Just imagine you want to make a huge number of transactions in a day and you want to do it at high speed (not in seconds, but in milliseconds). You already know that it is not possible for a human being to perform this way: so that's the reason why big financial institutions created an “automated” trading platform that processes this huge number of transactions automatically.
How it works?
These big companies created a trading platform software that makes the investment decisions based on an algorithm. That means that once some parameters are met, the software buys or sells a specific financial activity such as spot forex, shares, options, etc.
These algorithms are able to analyse the market trends and in milliseconds to place one or multiple orders.
What is the size of the High Frequency Trading?
It has been estimated that in 2016, the HFT initiated from 10 to 40% of the overall shares trading volume and between 10 and 15% in forex and commodities. In the past, some financial analysts estimated even higher percentages in the US shares trading volume, but then some other investigations reviewed that amount.
Advantages of High Frequency Trading
The high frequency trader has for sure the possibility to trade faster and take advantages of possible market trends in milliseconds: he has the possibility to earn from a trade since he tends to invest on this large quantities of money.
He gets a higher spread due to his “high-speed” trading, since he buys and sells really fast.
The markets attracted the HF traders by offering incentives to them: as result, the markets experienced a higher liquidity and higher volume of trading.
Cons of High Frequency Trading
This system penalizes the small investor, since he could not take advantage of a potential profit since the spread could be completely “cancelled” by the HFT. The market prices have been also determined in several circumstances by these massive tradings and this can affect the small investor.
Another factor is that this sort of trading has also determined the end of multiple broker dealers, but this can be seen also as a positive thing, since the trading fees have been reduced significantly.
