Technological advances, the incorporation of advanced computer programs and the extension of the use of intelligent devices, have had a profound impact on financial markets. It is no longer enough to have data in real time. Now highly sophisticated algorithms and programs have replaced a part of human decisions. Such is the case of what is known as High-Frequency Trading (HFT).
Since its implementation less than a decade ago, High-Frequency Trading (HFT) has gained as many followers as detractors. Let us revise what these computer-assisted practices are, and see the impact this development has had on the markets.
What is High-Frequency Trading (HFT)?
A conceptual definition could be that High-Frequency Trading is “the execution of investment strategies based on computer programs or opportunity-capture algorithms that may be small or exist for a concise period”.
Hedge funds, investment banks, and brokers apply these investment strategies, and some of their main characteristics are the accomplishment of high volumes of negotiations or of operations in which the benefits by the operation are quite low.
The operations that are carried out are kept in force for brief periods; we are talking about milliseconds. Let us see an example to understand better. Through a computer, employing High-Frequency Trading (HFT), someone buys a share at $ 10.00 and in instants it sells at $ 10.0001. Imagine that this is done thousands of times per second, and the profits become very important.
The benefits of HFT
For specialists, one of the main benefits of High-Frequency Trading (HFT) is the liquidity it provides to the markets. In fact, the New York Stock Exchange (NYSE) has a group of Supplemental Liquidity Providers (SPL), which offers incentives that can be reflected in the payment of a commission or a reduction in the price, which is currently around $ 0.0019, but considering the millions of transactions generated by High-Frequency Trading (HFT), we end up talking about essential figures.
This system of liquidity providers began to be applied shortly after the fall of Lehman Brothers in 2008, in order to avoid similar situations.
High-Frequency Trading (HFT) is permanently under observation because, as a consequence of how millions of operations are carried out in a short period, it has served to manipulate the markets. The authorities in charge of regulating the markets, and even the FBI, have detected fraudulent operations in which thousands of false purchase orders are thrown. It is known that HFTs operate at such a speed that they can block purchases made through traditional systems.
The most revealing example was the fall of the Dow Jones Industrial Average on May 6, 2010. In a matter of seconds, the index dropped more than 1,000 points, causing losses in the millions, and although it recovered a few minutes later, just in those few minutes it had liquidated the assets of many investors.
Today, trades made through a High-Frequency Trading (HFT) strategy represent 50% of the volume traded on the
New York Stock Exchange.
The debate is well served. For now, High-Frequency Trading (HFT) is a reality, and many hope that a future crisis of the markets will be more pious and not processed at the speed of lightning thanks to these strategies.