All about high frequency trading (THF)

Evolution of the practice of high frequency trading

the THF originated in 1999 with the authorization of electronic transactions by the American regulatory authority, the Securities and Exchange Commission (SEC). If initially it took a few seconds for the orders launched to reach the market, this speed increased to a few milliseconds a decade later. For example, the execution speed went from 20 milliseconds at the end of 2010 to 0.113 milliseconds in 20113.

After the financial crisis of 2008, the 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 index fell by 9% and lost about 1,000 points in five minutes before recovering. This phenomenon calledFlash Crash“triggered by a computer program, will be attributed to high frequency trading before an investigation shows five years later that it was caused by a trader based in London who launched false orders on the market. In 2011 the French Senate votes a amendment aimed at taxing high-frequency transactions which will ultimately be rejected by the Fillon government.

Over 85% of the world’s major stock exchanges are now fully electronic limited order markets and high-frequency trading accounts for almost 80% of global transactions and 40% of daily trading volume traded in equity markets in Europe. after 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, on which institutional investors invest large volumes without having to disclose transaction details to the market. Trades executed in dark pools thus bypass the data servers used by algorithms created by high-frequency trading specialists.

The dark pools are controversial. On the one hand, there is an argument in their favour, since large investors can trade large volumes without disrupting or disfavoring the financial markets as a whole. On the other, they allow professional 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 about these exchanges, it is believed that the volume traded is growing, while the volume of high-frequency trading in the public markets has declined. The ability to invest large volumes in dark pools without causing large price movements in the market means that investors in high-frequency trading 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 heightened the appeal of dark pools.

High frequency trading in a nutshell

the high frequency trading (THF) allows you to quickly take a position on 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 the THF offers speed in the execution of orders, note that it still requires a good command of trading, mathematics and programming of the particular traders who wish to use it.

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