High Frequency Trading-Why It Does Not Really Matter In Forex Trading

Posted by Mangi Madang on October 6th, 2014

High Frequency Trading (HFT), what is it? Who Is Involved? How Does high frequency trading work? How does High Frequency Trading Impact the retail forex trader like you? Should you be concerned about HFT?

Lets find out

By the way, you may also be interested in reading the following:

High Frequency Trading seems to gain a lot of attention lately with such news like the following:

and someone even called it high-frequency trading as legalized scalping   but what is high frequency trading and does it affect you the individual forex trader?

For a while, it seems that high frequency trading was largely done in stocks (or shares), commodities and futures markets etc but is high frequency trading also being done in the forex market?

DEFINITION OF HIGH FREQUENCY TRADING (HFT)

This is a very good definition of high frequency trading :

high frequency trading is when financial firms use complex computer programs to make money on the markets just for very small and tiny price moves. These computer programs exploit small minute movements in the markets for example buying a share at $1.00 and then sell less that a second later for 1.0001.

These trades are usually opened and closed in less than 1 second or fractions of a second. As a human being, you cant do that as you are too slow.

SO HOW DO HIGH FREQUENCY TRADING FIRMS MAKE THEIR MONEY THEN?

In the example above, the profit for one trade is only $0.0001. Thats a really appalling profit figure for a retail trader but not so for the high frequency trader.

You see, for high frequency trading firms. they have the technology and and financial capacity to trade and make very small, small, small  profits from very small price moves and the secrets is in the number of trades they place and they trade in thousands of trades in less than one second or fractions of a second and thats how they make their money. Let me give you and example of how its done:

1. in one second, if the high frequency trading firm buys and sell 100,000 times and makes a profit of $0.0001 each trade then the profit for that second would be $0.0001 x 100,000 trade =$10. So the HFT firm makes $10 per second
2. now theres 60 seconds in a minute, so in 1 minute, the high frequency trading firm would have made $600.
3. in one hour, it wold have made $36,000.
4. in 8 hrs, it would have made $288,000
5. in one month assuming 20 days and trading at 8hrs trading each day, the HFT firm would have made $5,760,00.

High frequency traders are not involved in  buying and holding traders like you and me waiting for price to hit the profit target about 30 pips aways which many take 15 minutes or 3 hrs!

They trade in seconds (or less than fraction of a second) with thousands of trades and make very tiny profits but once multiplied over thousands of trader per second, these tiny profits add up during the day.

HOW HAS HIGH FREQUENCY TRADING HAS CHANGED THE INVESTMENT LANDSCAPE?

Thanks to technology and advance of computers, high frequency trading definitely has impacted the financial landscape.

How?

Well, years ago, when traders bought whatever financial instruments, they hold onto it for years. Today, its is being said the average holding time has been greatly reduced as explained by this article below:

The high frequency trader is not concerned about the fundamentals of a currency pair and what causes it to move etcor in the share trading, the high frequency trader is not concerned about the value of a company in the long run so he could buy and hold and expect to make a profit after a period of time.