To keep up with the hectic nature of forex trading you need to know how to get ahead of the curve! One way traders do that is by going for more fast-paced & bigger trading, or in other words “high-frequency” trading.

In shorter terms, it's known as HFT and is a type of strategy many forex traders use to profit big and fast. How high-frequency trading works is that a trader buys a large volume of shares and then sells them automatically. Tons of traders use this method! To give you an idea, around 60% to 70% of traders in the US practice HFT in stocks.

But of course, just like any other trading strategy, this also comes with its fair share of pros and cons. So to know if HFT is for you, or not, below is a rundown of benefits and drawbacks to consider about high-frequency trading:

What are the benefits of high-frequency trading?

  • It's liquidity

One of the things you can count on HFT to be is liquid. High-frequency trading (HFT) businesses are vital to the preservation of market liquidity since they trade often. They provide a steady stream of buyers and sellers, which reduces bid-ask spreads and maximises market efficiency. In addition to benefiting HFT companies, other traders can also benefit from this proactive activity. All players in the market gain from the narrowing of bid-ask spreads brought about by HFT activity, which creates a more dynamic and liquid trading environment that promotes smoother transactions and price discovery.

2 - It's fast and efficient

The main reason that makes High-frequency trading (HFT) unique in the financial world is its unmatched speed advantage. HFT businesses use algorithms that execute transactions in milliseconds or less, with lightning-fast efficiency. Because of this quick speed, brokers can quickly take advantage of even the smallest changes in the market to their benefit. Being able to move quickly and precisely in the market can result in large returns, especially when dealing with large trading volumes.  

Also, HFT companies may take advantage of short-lived opportunities, execute deals at the best pricing, and maintain an advantage over rivals in the constantly changing financial markets by utilising this fast execution capability. This focus on speed benefits a wide range of market players by improving market liquidity and pricing efficiency in addition to increasing profitability for HFT businesses.

3 - Amps up risk management

High-frequency trading (HFT) algorithms come with advanced risk management capabilities. They can assist brokers in successfully managing risk by automatically reducing losses, adjusting positions, and diversifying portfolios in real time. This degree of automation can guarantee consistent risk management procedures and reduce human errors traders can't help sometimes.

4 - Offer great data analysis and pattern recognition

HFT computers are very good at analysing large datasets and identifying complex trading patterns. Their ability allows them to reveal hidden market possibilities that human traders frequently miss. HFT allows brokers to make more intelligent and well-informed trading decisions by leveraging advanced big data analytics, which in turn increases market profitability and efficiency.

What are the drawbacks of high-frequency trading?

1 - Instances of market manipulation concerns

Reports of purported market manipulation via high-frequency trading (HFT) companies have occurred. Order execution speed has the potential to create fake market trends, misleading other traders and affecting price dynamics. Authorities have made steps to address these concerns, but the underlying risk still exists, requiring constant monitoring and regulatory oversight to protect the integrity of the market.

2 - Is high in volatility

It has been debated that since computers respond to price changes so quickly, high-frequency trading (HFT) might trigger a domino effect of automated trading activity and increase market instability. This increased volatility makes it harder for traders to predict changes in the market, which raises the possibility of unanticipated losses and highlights the importance of effective risk management techniques.

3 - Increased regulatory scrutiny 

Due to the increase in popularity of high-frequency trading, or HFT, has drawn more regulatory scrutiny. Strict laws and guidelines have been put in place by several authorities to monitor and control high-frequency trading. HFT-related forex brokers must adhere to strict compliance standards and negotiate a complex regulatory landscape. Although, this can be seen in a good light–that it's safe and regulated. But this can be a real pain to be flexible with strategies with tons of regulations put in place.

4 - High infrastructure costs

It takes significant financial commitments to state-of-the-art infrastructure and technology to implement HFT tactics. Smaller Forex brokers may find it expensive to pay for co-location services, data feeds, and ultra-low latency connections.

Take away

So if you ask yourself how to trade forex using the high-frequency method, the first step is knowing everything you can about it, especially its pros and cons! Knowing what to expect, especially its advantages and disadvantages can help you better understand and navigate your way through this market efficiently.