In financial markets, high-frequency trading (HFT) is a type of algorithmic trading characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools. While there is no single definition of HFT, among its key attributes are highly sophisticated algorithms, co-location, and very short-term investment horizons. This refers to one of the many kinds of algorithmic trading strategies that involve lightning-fast execution of multiple signals designed to take advantage of arbitrage or scalping opportunities.
In the forex market, direct market access through the algorithmic trading systems allows buy-side traders to execute forex orders directly to the market. Direct market access occurs through electronic platforms, which often lowers costs and trading errors. Typically, trading on the market is restricted to brokers and market makers; however, direct market access provides buy-side firms access to sell-side infrastructure, granting clients greater control over trades. Due to the nature of algorithmic trading, order execution is extremely fast, allowing traders to seize short-lived trading opportunities.
As the most common subset of algorithmic trading, high-frequency trading has become increasingly popular in the forex market. Based on complex algorithms, high-frequency trading is the execution of a large number of transactions at very fast speeds. As the financial market continues to evolve, faster execution speeds allow traders to take advantage of profitable opportunities. Advocates of high-frequency trading in the currency market highlight its role in creating a high degree of liquidity and transparency in trades and prices.
High-frequency trading systems enhance the liquidity of the foreign exchange market, but in many cases, this benefit comes with a cost. Given the assumption that the forex market is one of the truest forms of capitalism, it is important to have a process that generates revenue to traders that are willing to provide liquidity. The forex markets have experienced the dangers of allowing high-frequency trading systems, as adverse market conditions are met with an enormous volatility that can cause significant losses.
Needless to say, it takes a large investment in infrastructure to develop proprietary trading algorithms, supercomputers and gaining the access to have them placed close to the action. So, the best strategy for the retail forex trader is to stay clear and use a different strategy. To compete where they have an edge or an advantage, retail traders shouldn’t try to compete with HFT at their game. Rather, they should play their own game where they have an edge. There are many other strategies the retail investor can use successfully. No need to take on the super scalpers unless you can afford the infrastructure and bank lines of credit to play their game.