What is High Frequency Trading (HFT) and Why is it Popular with Forex?

Nonetheless, the move from pigeons may have added some speed but the actual revolution in this respect came in the past decade or so. The hustle and bustle of the trading floors have largely been substituting by the reduced and persistent hum of computer data centers, which operated side-by-side using their conventional counterparts for a little while before edging them out.  

What is High Frequency Trading?

These data centers allow for what is called high-frequency trading (HFT), with the huge majority of deals in stocks and futures implemented by machines, allowing the process to be automatic and the calculations to be made at a quick rate on a fantastic scale. The time that it took you to read that last sentence could be used to create thousands of transactions by a computer.  On these numbers, it is possible to see why people do not stand much of a chance in the contest, let alone the poor pigeons.  Quite simply, it is about finding an efficient way to carry out plenty of trades in a really short space of time.  

The change to computer-based trading prompted a major rush to invest in talented-- and pricey -- coders and the form of hardware necessary to make networks capable of crunching large numbers in a very small space of time.  High frequency forex has emerged as a subset of the wider trend-- called algorithmic trading-- capitalising on the advantages of automation and rolling them out to a scale, extent and rate which may be crucial to the achievement of a trade.  It is easy, therefore, to determine why HFT is of excellent use in the foreign exchange market.  

UK-based traders used to take a look at the gold market or FTSE 100 may not be accustomed to the rapid pace and the volatility of currency, the world's biggest and most liquid market, but anybody engaged in the money will appreciate this as part of its appeal as an investment.  Everybody engaged in forex will understand that this cost volatility-- in a 24/7 market-- can be prompted by a plethora of factors-- politics, weather, criminal action, economics etc..   HFT relies on having the ability to take that information and act on it in scale.  Programs are designed to have the ability to act upon small movements in currency prices, the kind of movement that would make mere pennies in a small scale but could deliver larger returns once the transactions are numbered in the millions.

This is the way a leap of a percentage of cent down or up could lead to massive returns for investors and, given the movement in the marketplace when it comes to forex, that implies that the perfect algorithm, using a fast enough connection, can identify and respond to a lot of diverse opportunities in one day, let alone a month or week.  HFT forex trading is, thus, an exaggerated form of conventional forex trading, using complex algorithms to earn big trading opportunities from the tiniest of moves.  

Forex is a market characterized by the continuous stream of such movements, which makes it the ideal choice to apply those principles.  Yet, while the chance is exaggerated, so too is the risk, and that's why it's so important to perfect the calculations which underpin the trading decisions.  A major mistake in a grand scale could be every bit as bad as a intelligent choice at scale. Risk and liquidity specify the currency market, HFT techniques accentuate both of these.