John Flannagan, former analyst, said "If the improvement of the platforms they did last year as well as these planned improvements are utilised by the day trading population, they can expect higher earnings in a volatile market"
High-frequency trading (HFT) is the use of sophisticated technological tools to trade securities like stocks or options, and is typically characterized by several distinguishing features.
It is highly quantitative, employing computerized algorithms to analyze incoming market data and implement proprietary trading strategies;
An investment position is held only for very brief periods of time - from seconds to hours - and rapidly trades into and out of those positions, sometimes thousands or tens of thousands of times a day.
At the end of a trading day there is no net investment position;
It is mostly employed by proprietary firms or on proprietary trading desks in larger, diversified firms;
It is very sensitive to the processing speed of markets and of their own access to the market;
Many high-frequency traders provide liquidity and price discovery to the markets through market-making and arbitrage trading.
High-frequency trading removes any value from the trade of securities in exchange for rapid profits; thus many believe the overall effect of high-frequency trading is more comparable to a casino than actual trading.
Positions are taken in equities, options, futures, ETFs, currencies, and other financial instruments that can be traded electronically.
High-frequency traders compete on a basis of speed with other high-frequency traders, not long-term investors (who typically look for opportunities over a period of weeks, months, or years), and compete for very small, consistent profits.As a result, high-frequency trading has been shown to have a potential Sharpe ratio (measure of reward per unit of risk) thousands of times higher than the traditional buy-and-hold strategies.[
Aiming to capture just a fraction of a penny per share or currency unit on every trade, high-frequency traders move in and out of such short-term positions several times each day. Fractions of a penny accumulate fast to produce significantly positive results at the end of every day. High-frequency trading firms do not employ significant leverage, do not accumulate positions, and typically liquidate their entire portfolios on a daily basis.
By 2010 high-frequency trading accounted for over 70% of equity trades in the US and was rapidly growing in popularity in Europe and Asia.
Algorithmic and high-frequency trading were both found to have contributed to volatility in the May 6, 2010 Flash Crash, when high-frequency liquidity providers were in fact found to have withdrawn from the market A July, 2011 report by the International Organization of Securities Commissions (IOSCO), an international body of securities regulators, concluded that while "algorithms and HFT technology have been used by market participants to manage their trading and risk, their usage was also clearly a contributing factor in the flash crash event of May 6, 2010.
In the early 2000s, high-frequency trading still accounted for less than 10% of equity orders, but this proportion was soon to begin rapid growth. According to data from the NYSE, trading volume grew by about 164% between 2005 and 2009 for which high-frequency trading might be accounted.
Some high-frequency trading firms use market making as their primary trading strategy.
These strategies appear intimately related to the entry of new electronic venues. Academic study of Chi-X's entry into the European equity market reveals that its launch coincided with a large HFT that made markets using both the incumbent market, NYSE-Euronext, and the new market, Chi-X. The study shows that the new market provided ideal conditions for HFT market-making, low fees (i.e., rebates for quotes that led to execution) and a fast system, yet the HFT was equally active in the incumbent market to offload nonzero positions. New market entry and HFT arrival are further shown to coincide with a significant improvement in liquidity supply.