The use of technology in online crypto trading has given rise to numerous trading strategies that take advantage of its notorious volatility. One such strategy is known as high-frequency trading (HFT).
What is it?
In essence, HFT involves the use of automated systems to execute extraordinarily high-speed transactions. These systems include high-tech hardware and advanced algorithms capable of handling millions of transactions in mere seconds. By doing so, they allow a trader to exploit transient pricing inefficiencies in the cryptocurrency market in order to make a profit.
How Does it Work?
The sophisticated platforms used for this strategy basically analyze tons of market data to identify hidden trading opportunities. Since such opportunities usually exist for a fleeting period, possibly a millisecond, the resulting transactions are referred to as microtrades.
By virtue of the brevity of the trades, the profits from a single transaction might be mere fractions of cents. However, since these sophisticated algorithms carry out high volumes of trade within a single trading day, the profits will rapidly accrue to significant levels. This explains why the strategy uses computerized systems, as human beings lack the capacity to process the high amounts of data that the strategy requires.
One of the most popular methods used for high-frequency trading has to do with arbitrage. Arbitrage allows traders to make profits from predictable, yet fleeting imbalances between supply and demand. In such cases, the automated system will spot a market shift, anticipate an emerging trend and capitalize on it.
Why is it Popular in Online Crypto Trading?
As mentioned at the onset, what makes this strategy particularly advantageous in online crypto trading is the high volatility of the market. Keep in mind that the fundamental principle of HFT is the exploitation of price swings. Therefore, the constant price fluctuations in the cryptocurrency market mean plenty of profit-making opportunities.
- The strategy is beneficial to crypto exchanges as it increases liquidity by creating a high volume of trade. Consequently, some exchanges even offer incentives to high-frequency traders so as to get higher market liquidity.
- Traders using the strategy get access to multiple crypto exchanges and markets and are therefore able to maximize on profit-making opportunities.
"One of the key controversies surrounding the strategy has to do with claims from opponents that it can be used for market manipulation. Due to the fact that trades take fractions of seconds, it can trigger big market moves.
"Another major critique is its high complexity that locks out small traders and favors large, institutional players. It is thus said to give the large players an unfair advantage over smaller ones.
The Final Word
High-frequency trading is experiencing a surge in online crypto trading as it allows traders to make profits no matter the prevailing market trends. Though it was initially limited to large investors such as hedge funds and investment banks, its popularity is rising even among smaller players.
Thanks to the introduction of automated trading bots, retail investors and cryptocurrency day traders are also joining the hype. It goes without saying, however, that the level of success of the strategy will depend on the speed and efficiency of the system in place.