High Frequency Trading HFT

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High frequency trading HFT

What is HFT and how does it work?

High frequency trading (HFT) is buying and selling stocks at an incredible speed, we are talking about milliseconds. This is too fast to manual put in the orders, hereby taken over by powerful computers. They run by sophisticated algorithms that are independently scanning the market for opportunities. Those programs have very low turnover rates per share, only a few cents or even less. However since they trade thousands of stocks each day those amounts add up. The main users of HFT are big and powerful investment banks like Goldman sacks (Mcgowan, 2010) because HFT systems are an enormous capital investment. You do not only need very expensive and powerful PC’s, but those PC’s have to be as close as possible to the stock market servers in order to be the first to see the data. The data travels true wires at the speed of light, so if you are further away from the servers of the stock market you’re trading in, you will get your data split seconds later as high frequency traders who have their servers closer to those of the stock market. Since HFT trades in milliseconds, those split seconds could lead to some major disadvantages. Not only do you need those powerful and perfectly placed computers, the key to HFT are those complex algorithms. Highly skilled people are needed to figure out such algorithms and they have their price. It seems now that ones you have those almighty algorithms you can sit back and let the Pc’s do all the work. This is not entirly true, you will have to adjust and keep your algorithms update by using the five step sientific method discribed by (Grvetter & Forzano, 2009) . First you have to observe the market and try to find patters which you are then trying to profitable exploid using sophisticated algorithms. Once you have found your algorithms, you will make a prognose on how well they are going to preform on the stockmarket. Afterwards you let the program run and obervate



References: Floriaan. (2011, november 14). Wat is high frequency trading? Beleggen (Financieel) , 1. Grvetter, F. J., & Forzano, L.-A. B. (2009). Research methods for the behavioral sciences third edition. Belmont, USA: Wadsworth Cenage learning. Mcgowan, M. J. (2010). The rise of computerized high frequency trading: Use and Controversy . Retrieved from http://www.wikinvest.com/wiki/High-Frequency_Trading_(HFT)

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