High Frequency Trading THF or HFT: High-Frequency Trading, are the high-speed execution of financial transactions made by computer algorithms. This is one of the categories of the “automatic trading” based on statistical decision, which increasingly manages stock market data in the manner of a Big Data that has become inaccessible to traditional human and banking analysis.
These virtual market operators can thus execute transactions on financial markets: stock exchanges or over-the-counter markets in a few microseconds. While the THF transaction speed of the THF was still 20 milliseconds at the end of the 2010 decade, it increased to 113 microseconds in 2011.
According to La Tribune, the THF now dominates market activities. To the point of shading traditional investors, and likely to be more regulated in the future. With a market share of 60% on Euronext and nearly 90% in the United States, THF has become a must in recent years. No wonder that investments in IT infrastructure for the THF reached $1.5 billion in the United States in 2013.
The THF is therefore one of the most advanced research topics in finance, not to mention that it represents major challenges for regulators, particularly the AMF. Thus, it is necessary to maintain this algorithmic trading? What are its advantages? Where is she going to go?
A model that calculates profits. While some people are delighted with the rise of high-frequency trading, such as Goldman Sachs, which has practically no more human traders in New York but no more IT engineers, this development constitutes a formidable competition with conventional investors, who place their orders much less quickly than algorithms.
The high-frequency trading model is based on a Nash equilibrium, the teacher-researcher draws the following conclusions:” The higher the speed, the more liquid the market, which improves price quality. However, speeding can be detrimental to the benefit of THF, as speed is a time competition.
In other traders, profits fall with speed. Finally, price volatility decreases with the THF, but increases with traditional traders“. He added: “high-frequency trading makes infinitely more than others. For small carriers, there is no point in gaining speed against the THF. They should focus on longer-term strategies rather than intraday transactions“.
But like any success, the regulations are to come: currently governed by the European Directive MIF 1, the THF will be supervised by MIF 2 from January 2018. This device will make it possible to identify the orders placed by each algorithm and thus help researchers in their future work. And we will suspect that many more regulations are coming for THF if it continues to generate more profits.
Thus, the future of THF has a bright future as have technological developments with the Big Data, La Blockchain for instance. But only if they are not overly regulated, otherwise other new technologies will emerge as a virtuous circle.