Financial Markets Coursework

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High Frequency Trading (HFT) and Algorithmic trading (AT)
Security trading has evolved significantly since last decades due to the rapid development in information technology. Many aspects of the traditional floor-based trading have replaced by automated electronic systems and market participants were embracing faster and more efficient market access models comparing to the past mechanisms such as telephone and mail. Under this background, the concepts of Algorithmic Trading and High Frequency Trading are gradually being known by the public and has attracted wide discussions as to whether these new forms of trading are beneficial to the market not or. The relationship between algorithmic trading and High Frequency Trading has frequently caused confusion among general public. While they are in fact inter-linked, the latter is a sub-set of the former so that they have shared similarities as well as differed with each other. There are extensive definitions from both general reports and academic literature for these two terms, for example, European Commission (2010) has defined them as follow:

“[…] Algorithmic trading can be defined as the use of computer programmes to enter trading orders where the computer algorithm decides on aspects of execution of the order such as the timing, quantity and price of the order.” (Public consultation, 2010, p14)

“A specific type of automated or algorithmic trading is known as high frequency trading (HFT) […] best defined as trading that uses sophisticated technology to try to interpret signals from the market and, in response, executes high volume, automated trading strategies, usually either quasi market making or arbitraging, within very short time horizons.” (Public consultation, 2010, p14) In general, these trading methods are based on computer algorithms with pre-determined rules and decisions, submitting and managing orders automatically and directly to the market without human intervention. In particular, high frequency...
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