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Top Performing HFT (High Frequency Trading) Strategies & Tips

By Christopher Lewis
Christopher Lewis has been trading Forex and has over 20 years experience in financial markets. Chris has been a regular contributor to Daily Forex since the early days of the site. He writes about Forex for several online publications, including FX Empire, Investing.com, and his own site, aptly named The Trader Guy. Chris favours technical analysis methods to identify his trades and likes to trade equity indices and commodities as well as Forex. He favours a longer-term trading style, and his trades often last for days or weeks.

High-frequency trading (HFT) is an intriguing and controversial technological development. It is on the brink of the next leap forward with quantum computing enabling transaction speeds previously thought impossible. HFT trading strategies can provide significant profit potential, but only with the proper hardware and software. This article will introduce you to HFT, cover the primary HFT trading strategies, and note the regulatory challenges to give you an idea of whether HFT is a venture you should pursue.

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Top-Rated High-Frequency Trading Strategies 

HFT trading strategies form the trading backbone for some of the most dominant market participants. The best high-frequency trading platforms can provide liquidity, act as market makers, use momentum trading and engage in arbitrage trading.

The top-rated HFT trading strategies are:

HFT trading strategies are not easily accessible to retail traders. However, they can learn from the momentum trading of HFT firms and model their approach accordingly, so long as they can code the necessary algorithms. Scalping is the closest momentum trading strategy retail traders can mirror from the HFT trading strategies but at a much smaller scale. While HFT firms place millions of orders per second, retail scalpers can transact dozens of orders.

What Are High-Frequency Trading (HFT) Firms? 

HFT firms require competent computers or computer clusters, advanced algorithms, machine learning components, artificial intelligence, and co-location to exchange servers to generate profits in milliseconds amid an ultra-competitive landscape and against evolving technological and regulatory requirements. The HFT trading strategies are proprietary solutions providing a micro-edge over competitors.

HFT firms profit from micro-movements in price action and place millions of traders per second at a speed inconceivable by the human mind. They hold trades for fractions of a second and can add liquidity by trading the bid-ask spread, placing buy and sell orders simultaneously in the same asset. Most HFT firms trade equities, as necessary anomalies are more frequent and last longer than in the Forex market.

How High-Frequency Trading (HFT) Firms Work 

HFT firms are often proprietary trading firms using internal capital, technology, and development to create HFT trading strategies. They place millions of orders per second and may use tactics including sniffing, pinging, and sniping to test momentum behavior before placing their trades. HFT firms also use arbitrage trading, provide liquidity, and act as market makers. HFT firms are responsible for an estimated 50% of trading volume in the US and up to 43% in Europe.

The Three Primary Types of HFT Firm 

Some of the Most Notable HFT Firms 

  • Citadel Securities
  • Virtu Americas 
  • G1 Execution Services
  • Two Sigma Securities
  • Wolverine Securities
  • Jane Street Capital
  • UBS Securities
  • Goldman Sachs & Co.
  • Tradebot Systems Inc.
  • Jump Trading
  • Five Rings Capital LLC
  • Allston Trading LLC
  • Geneva Trading
  • Chopper Trading
  • DRW Holdings LLC
  • Susquehanna International Group LLP (SIG)
  • Hudson River Trading (HRT)

What Is a High Frequency Trading Strategy? 

HFT trading strategies are the strategies HFT firms use to generate profits. Variants of momentum and arbitrage trading account for most HFT trading strategies, which each HFT firm develops in-house and guards at all costs, as it represents their primary competitive edge, followed by their technological infrastructure and collocation.

Strategy Types 

Below is a snapshot of three HFT trading strategies.

Market Making 

  • Liquidity provision
  • Rebate-driven strategies
  • Quote matching

High-Frequency Momentum Trading 

  • Short-term momentum
  • Sniffing, pinging, and sniping
  • Spread capturing

High-Speed Trading Platforms 

  • Direct market access
  • Minimal latency
  • Maximizing trade efficiency

Regulatory Challenges 

HFT firms face an evolving regulatory framework to ensure market fairness, and pending regulatory changes and proposals could decrease the competitive edge of HFT trading strategies. One example is the SEC proposal to enforce auctions before executing retail orders. It would increase trading costs and slow down trading speed. Regulatory changes pose a significant and potentially existential threat to HFT firms.

HFT Trading Strategies – Pros and Cons 

Traders should consider the pros and cons of HFT trading strategies to understand them better.

The Pros of HFT Trading Strategies 

  • Vast trading opportunities
  • High-speed trading
  • Liquidity injections that can create more efficient trading conditions for other market participants

The Cons of HFT Trading Strategies 

  • Increased volatility
  • Less profitable during higher market volatility
  • Ability to trigger market crashes due to hardware or software errors
  • Few market participants can engage in HFT trading and may control short-term directional trades

Bottom Line 

HFT firms develop HFT trading strategies in-house, and the advancement of machine learning, AI trading software, and quantum computing will usher in the next leap forward in HFT trading. Despite their controversial practices and potentially existential regulatory threats, HFT firms inject much-needed liquidity and can create more efficient trading conditions for other market participants. HFT trading strategies are generally inaccessible to retail traders, except for momentum trading. Retail traders may adapt by following the HFT approach on a micro-scale.

FAQs

What are the risks of HFT trading?

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The core risks of HFT trading are software glitches, hardware failure, quickly changing market conditions, compliance, and cybersecurity threats. One of the most well-known cases is a software glitch at former HFT firm Knight Capital, the largest equity trader in the US at that time, with a market share of 17.3% on NYSE and 16.9% on NASDAQ. A technician forgot to copy the new Retail Liquidity Program (RLP) code to one of the eight SMARS computer servers, and Knight Capital bought and sold 397 million shares in 154 equities listed on the NYSE in the first 45 minutes of trading on August 1st, 2012, resulting in a pre-tax loss of $440 million.

Do brokers allow HFT?

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It depends on the brokerage, but some of the best-known brokers have in-house HFT firms or work with HFT by directing order flow to them in a practice known as payment for order flow or PFOF.

Is HFT trading legal?

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HFT trading is legal if the firms do not engage in illegal market manipulation or insider trading. HFT adds market liquidity and can improve trading efficiencies for other market participants, but the practice remains highly controversial, and the legal and regulatory framework continues to evolve.

Is HFT trading profitable?

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HFT can yield tremendous profits if the proper infrastructure exists. HFT traders require competent computers, ultra-low latency connections to exchange servers, ideally collocated in the same room, and complex algorithms to analyze and execute many orders in fractions of a second, often millions in a few seconds.

What are the strategies for HFT?

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The primary HFT strategies are arbitrage, market making, and momentum trading. All HFT strategies require complex algorithms and superb technology.

Christopher Lewis
About Christopher Lewis
Christopher Lewis has been trading Forex and has over 20 years experience in financial markets. Chris has been a regular contributor to Daily Forex since the early days of the site. He writes about Forex for several online publications, including FX Empire, Investing.com, and his own site, aptly named The Trader Guy. Chris favours technical analysis methods to identify his trades and likes to trade equity indices and commodities as well as Forex. He favours a longer-term trading style, and his trades often last for days or weeks.
 

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