All about high-frequency trading (THF)

Development of high frequency trading practices

that THF originated in 1999 with the approval of electronic transactions by the US regulator, the Securities and Exchange Commission (SEC). If at first it took a few seconds for the launched orders to reach the market, this speed increased to a few milliseconds a decade later. For example, execution speed went from 20 milliseconds in late 2010 to 0.113 milliseconds in 20113.

After the 2008 financial crisis, THF experienced a slowdown due in particular to the cost of infrastructure, the arrival of alternative trading platforms and the strengthening of legislation on high-frequency transactions.

In 2010, the Dow Jones fell 9% and lost about 1,000 points in five minutes before recovering. This phenomenon is calledFlash Crash“triggered by a computer program, will be attributed to high-frequency trading before an investigation five years later shows that it was caused by a London-based trader who launched fake orders into the market. In 2011, the French Senate voted an amendment that aims against taxing high-frequency transactions, which will ultimately be rejected by the Fillon government.

Over 85% of the world’s largest exchanges are now fully electronic limited-order markets, and high-frequency trading accounts for nearly 80% of global transactions and 40% of daily trading volume traded on European stock markets, according to data from Tabb Group.

High frequency trading and dark pools

Given the importance of data for high-frequency trading and the rising cost of that data, the role of dark pools is paramount. These are private exchanges where institutional investors invest large amounts without having to disclose transaction details to the market. Thus, trades executed in dark pools bypass the data servers used by algorithms created by high-frequency trading specialists.

That dark pools are controversial. On the one hand, there is an argument for their benefit, as large investors can trade large volumes without disrupting or degrading the financial markets as a whole. On the other hand, the pros allow the giants to deal with each other, leaving other players in the dark.

These private scholarships are nothing new. Dark pools have been around since the 1960s. Although there is little data on these exchanges, it is believed that the volume traded is growing, while the amount of high-frequency trading in the public markets has decreased. The ability to invest large amounts in dark pools without causing large price movements in the market means that high-frequency trading investors can no longer execute large trades in public markets.

The focus then shifts to lower volume trades that are not made for high frequency trading. “Flash crashes” or sudden price movements caused by high-frequency trading have only increased the attraction of dark pools.

High frequency trading in a nutshell

that high frequency trading (THF) allows you to quickly position yourself in the markets and take advantage of price movements thanks to algorithms. This trading technique is essentially based on two elements: the speed of transactions and their automation.

If THF offers speed in the execution of orders, be aware that it still requires a good command of trading, mathematics and programming by the particular traders who want to use it.

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