High Frequency Trading – The Best Example of increased Technological Growth

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People who are facing financial problem are quite aware of the dramatic changes that are required through “High frequency Trading” or they also call it HFT in short. As per the information, the SEC Chairman Mary Schapiro stated that HFT accounts more than 50% of entire equity market volume across the US. As estimated, it is as high as 80%.

Large number of buy and sell occurs by knowing more on high frequency trading through computers at the speed of sub milliseconds. It is the direct result of the regulatory changes in the structure of the US Stock markets with the introduction of RegTS in 1998 and RegNMS in 2005.

By the considerable effect on electronic exchanges Reg ATS opened numerous ways for “alternative trading systems” and Reg NMS helped to improve the fairness price execution on those numerous exchanges.

Nowadays, number of trading firm is developing computer algorithms to take maximum advantage of the production in the execution venues giving birth to high frequency trading. Some of people are also considering that high frequency trading is a bad thing, but one cannot deny that it has benefited so many of us. It has spread the difference between the bid and offer prices and are mostly a lot less nowadays than they were in the past, intra-day volatility has gone lower in the most part. In the market there is immense liquidity available in the market and the cost of trading has been completely reduced.

As per the information from the detractors, the growth in the high frequency trading has created a situation where most of the market trading volume comes from trading of the machine with each other. And it has led traditional investors to withdraw lot of money from the markets. The fact is that no one can stop the technological progress and the debate will go on.

The trading firms can realize the advantages of the technology through installation of highly powerful hardware and software through boost the speed of communications links. This will help in reaping the benefits of high frequency trading.

The best part is that the SEC is currently taking the review of entire US market structure and is focusing on an appropriate response in this fast-changing environment. With the passage of time, we will get to know the impact of those new rules and regulations whether it is good or bad for the future market.

There are several advantages of HFT:

  1. Increased liquidity and better management – HFT helped in maximizing orders ten times. Whatever their type is they are always bought and sold. During the time of panic, when lots of financial mistakes were done by traders, the algorithm has proven itself as one of the best tools to start and restart.
  2. Market Efficiency – The algorithm is used to identify anomalies in the financial world.
  3. Operation risk – It boosts the speed of transactions using ultra powerful algorithms.
  4. Unfair Market – The individuals are penalized since they do not have high performance equipment as the risk persist due to enrichment of more influential companies.