High and Ultra High Frequency Trading

High and ultra-high-frequency trading (HFT and UHFT) are one of the big things now days in the forex market, especially at an institutional level. Some of the practices involved have been considered to be in legal gray areas and the SEC (Securities and Exchange Commission) have been trying to regulate some of these practices.

These forms of trading are used to execute short-term trades which are usually done within seconds. This is a type of trading that many people don’t know about and wouldn’t even recognize as normal forex trades. Certain trades such as flash executions are done by stepping in front of a large order to garner a few pips as it pushes prices up.

What these computer programs are designed to do are to watch out for anomalies in the data set from the pool of large liquidity providers. Then they try to predict and profit from what other automated systems are going to do. Essentially, they reverse-engineer the other online programs decision making processes through analysis of when they place orders.

These computer programs are specialized for electronic trading at times that may only be available for a few seconds. When it comes to these traders it becomes a competition of speed for very small but consistent profits. So what this means is that they are always looking for these types of trades and that entails always being alert to what’s going on.

High-frequency trading is very unlike the normal forex trading that consists of long term investment. This is where traders are looking for good opportunities over a period of weeks or even months. High-frequency trading is much more competitive and keeps traders on their toes. Falling behind in these types of trades will leave you with little to no profit.

Benefits of High-Frequency Trading

Many people claim that this type of trading increases the liquidity of the market and can help other traders, such as long-term investors, in their own forex trades. Also, there have been studies done to show that high and ultra-high-frequency trading lowers costs of trades, increases information of quotes, improves linkage between markets and many other positive effects.

This is not to say that this type of trading is the best way to go. Without a doubt, this type of high-frequency trading is only used by very specific traders and can be very costly if you don’t know what you’re doing with it. So in our opinion, it is usually better to stick with long-term investing rather than trying your hand with high-frequency trading.

Problems With High-Frequency Trading

The biggest issue surrounding this type of forex trading is all of the controversy that it has been involved in. Even though there have been positive findings, many have debated that it can create what they call a two-tiered market causing a class of traders to be able to exploit others.

The main groups of opposition for this type of trading are the SEC and the Commodity Futures Trading Commission. These two agencies have been against this type of trading because of the negative effects that they believe it has on the market. Even though they have not been able to fully stop it, they continue to try and regulate high-frequency trading and we will see where it takes us in the future.