High-frequency trading (HFT) is an advanced trading technique driven by sophisticated algorithms that can perform a large number of trades within periods measured in microseconds. While it was originally a strategy of traditional financial markets, this type of trading is being more and more carried out nowadays in the cryptocurrency space, thanks to the liquidity and suspense factors.
HFT is set up from highly powered computers and software, real-time data analysis of market happenings, and identifies end time for completion of transaction ahead of the human trader. Strategies include small price disparities, the use of arbitrage, and cashing in on the bid-ask spreads across exchanges. For the most part, speed is the mainstay of HFT, an arena where traders invest huge sums of capital to indulge in low-latency systems and colocate servers right next to exchange hubs to earn an advantage.
HFT normally boosts liquidity in markets, that is valuable since it decreases spreads and increases price efficiency (as in having a number of sellers and buyers who are avid for something that is already difficult to find). Efficient trading on small moves might let investors acquire revenue more consistently due to inadequacies which are serious if exploited quickly. It is also emotionless, since it is automated.
But as HFT does positive work at times, with it come challenges as well. With such kind of trading only being available to a very select set of retail traders, it also requires heavy technological and financial investments. It can even worsen market volatility and create system-threatening risks such as crashes. Its impact on the market's fairness is being intensively scrutinized.
From an overall perspective, HFT is a black box where technology meets finance, thereby opening a very huge door to those who have the skills to navigate the complexity.
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~ Nesaty