Using algorithms, computationally intensive power and low latency trading technologies, high frequency trading (HFT) seeks to take advantage of market price inefficiencies in order to make a profit. HFT is a good target for market instability because it forces investors to trade in large numbers and is more lucrative in volatile markets. When the VIX, or “fear gauge”, fell to an all-time high in November 2017, HFT firms suffered, with overall US stock trading revenue falling below $1 billion for the first time since 2008.
2017 was a year of peace in the equity market, but a year of turbulence in the cryptocurrency market. At a time when the price of Bitcoin rose from $900 to $20,000, HFT companies and other institutional investors were paying attention. An opportunity has been seen by various cryptocurrency exchanges which have started rolling out particular services and platforms for HFT companies. In this article, we will provide you with information on how the crypto market embraced Algo and HFT.
HFT and Algo meet cryptocurrency
There are four main types of HFT strategies: market making, momentum trading, liquidity sensing, and arbitrage. High-frequency traders take advantage of the disparity between bid and ask prices by using latency to buy and sell assets in microseconds. Momentum strategies are based on detecting short-term price movements and projected market reactions. Trading in the market activity of other traders is the primary goal of liquidity detection methods, which rely heavily on recognizing the market commitments of other traders, often institutional investors.
The most common HFT approach is arbitrage trading, which discovers price discrepancies between two identical assets and uses the difference for profit. HFTs can use latency arbitrage to exploit these misalignments, which are typically caused by low latency.
To properly implement a latency arbitrage strategy, companies must have computationally intensive capabilities and trading algorithms that can notice and react quickly to changes in market prices. Nowadays, as the number of people getting into cryptocurrency trading is increasing around the world, the demand for algorithm-based tools is also increasing. The main reason behind this is that AI makes the trading process much easier. Therefore, as the demand for platforms that provide customers with HFT and algo tools grows, you can find several competent companies in the industry. Some of the best examples are Bitsgap, Bitcode AI, Zignaly, Cryptohero, which provide crypto investors with myriad tools to successfully generate and implement strategies. The volatile nature of the cryptocurrency market makes it an attractive target for auto traders.
Like the foreign exchange market, where high frequency trading (HFT) is a major player, the cryptocurrency market operates around the clock. The cryptocurrency market also offers traders a high degree of flexibility. Investors in the crypto market can take advantage of the wide range of cryptocurrencies and fiat currencies available to them.
Difference Between HFT and Algorithmic Trading
The terms “algorithmic”, “high frequency”, “algo” and “automated trading” are often used in financial market articles. With so many meanings, it’s easy to get lost and confused. Technical and financial environments present many complexities, and even small changes in operations can lead to the development of entirely new words and phrases. Automated or algorithmic trading is also known as algo trading or black box trading. Automated trading solutions use a set of algorithms and execution methodologies to automatically place orders on a market or exchange after technical analysis.
Additionally, pre-programmed algorithmic trading instructions are used to trade on a set of established parameters such as market price, time, and volume. In order to compensate for orders that are too large to be sent at one time, an “execution algorithm” sends “child orders” (small slices).
To get the best price in a certain amount of time, it’s best to split a large purchase into smaller ones. An aggressive market appreciates small orders. Trading with large market volumes such as mutual funds, investment banks, hedge funds, etc. can greatly benefit from algorithmic trading.
Algo-trading aims not only to profit from trading but also to reduce the influence on the market and the danger of executing an order. Traders don’t have to keep an eye on stocks or manually deliver tranches.
Algorithmic trading includes high frequency trading. It has a high turnover rate, is co-located and has high order-to-order ratios as its main qualities.
The high frequency trading solution handles small scale trade orders and sends them to a market or exchange at high speed. Spreads between bid-ask prices help him. When it comes to trading, this method is a market maker because it is so fast.
In the realm of DeFi, high frequency trading (HFT) is accepted and even encouraged. But it’s a whole different type of HFT. DeFi has transformed the dynamics of high frequency trading (HFT) into an environment where speed is not the only factor.
HFT strategies have long been known for their ability to trade quickly. While this is a good thing, the HFT business has grown to focus more on achieving microsecond speed advantages than core technology advancements. DeFi’s HFT strategy relies heavily on trading speed, but it’s not the only one that works. The programmable and on-chain nature of DeFi offers additional aspects that decide whether HFT techniques succeed or fail.