72 Frequently Asked Questions or FAQ about high frequency trading that investors asked are from the High Frequency Trading Explained course that provides a detailed examination of the high frequency trading technology and process as well as the market changing impact. The many questions investors asked are listed here and linked to each individual lesson. Both this list and the lessons are regularly updated as markets, investments, and investing change.
FAQ about high frequency trading from the lesson, Introducing high frequency trading explained
What is high frequency trading?
High-frequency trading combines computer trading systems, the fastest processors, cutting-edge programming, and advanced communication technology with inside market deals. These systems trade vast trading volumes at blazing speeds, many times faster than any human trader.
But the inside deals with exchanges give high-frequency traders technical and operating advantages over all others. Exchange server colocation and data access, including exposure of investors' orders, changed everything for investors and markets.
That impacts trades of shares, commodities, options, and currencies with effects that touch every investor and the economy.
See more details, discussion, and FAQs in this lesson:
Introducing high frequency trading explained.
Why should investors know about high frequency trading?
Successful investors know high frequency trading is a major force affecting markets, investments and investors. By understanding how that happens, they can become more successful wealth builders. Although restricted in some markets, the effects of high frequency trading have a significant influence in every market. Wise investors that know and learn how to minimize those effects, can maximize their investment success. For more details, discussion and FAQ see the lesson, Introducing high frequency trading explained.
Introduction to high frequency trading provides an overview of to understand this change in stock markets.
Does high frequency trading affect individual investors?
Yes, high frequency trading impacts everyone including individual investors. That includes anyone with a government or private pension. In fact, investment orders of pension funds and other large institutions are the main target of high frequency traders. But high frequency traders don’t hesitate to hit the market orders of retail investors as well. Call it collateral damage or roadkill, contrary claims are a high frequency trading spin. Technology and preferred access let high frequency traders front-run any investor order. So sharp investors learn how to protect their orders from high frequency traders. For more details, discussion and FAQ see the lesson, Introducing high frequency trading explained.
How does high frequency trading work?
High-frequency traders earn profits of a fraction of a cent per trade on millions of open-market orders. They take advantage of market movements by buying, holding an order briefly, then selling, and continuously repeating this process.
This trading scheme requires advanced computer and communication technologies programmed with sophisticated algorithms.
Privileged access to trading systems and investors' open market orders is essential to maintain the system. High fees paid to exchange management ensure that this scheme runs smoothly for high-frequency traders.
As a result, the trading volume driven by these algorithm-powered systems can be as much as half of the total market volume.
See more details, discussion, and FAQs in this lesson: Introducing high frequency trading explained.
What do high frequency traders do?
High frequency traders prey on investor orders by applying cutting edge computer and communication technology with excellent algorithmic programming in privileged inside positions that give them access to investor orders so they can trade stocks, commodities, options, and currencies ahead of other investors. Trading in huge volumes, they hold for a small fraction of a second then sell at a profit. Their critical execution speeds have reached the fastest in the history of the world! The effects of high frequency trading touch every investor and person, even those who have no idea what computerized trading is or even what the stock market means. See more details, discussion and FAQ in the lesson, Introducing high frequency trading explained.
Does high frequency trading affect stock markets?
High-frequency trading significantly impacts markets trading shares, commodities, options, and currencies, just as technology affects all aspects of life and society.
Besides the blazing automated trading speeds and volumes that affect every investor, much of the market volume is now high-frequency trading.
To protect their orders from the skimming of high-frequency traders, savvy investors set the price they are willing to pay or accept.
See more details, discussion, and FAQs in this lesson: Introducing high frequency trading explained.
FAQ about high frequency trading from the lesson, Racing for profits drives high frequency trading
Where did high frequency trading come from?
High frequency trading adds powerful technology to the unending stock market race for profits. That continues a trend started by the first stock exchange that funded sailing ship ventures to increase the volume and speed of world trade.
High frequency trading is another example of technology affecting markets to impact economies and investors. It combines technology, well-paid allies, passive regulators, and an accommodating business climate in the profit race.
The infographic in the linked lesson illustrates the progression of multiple technologies used by high frequency trading and the market impact.
See more details, discussion, and FAQs in the lesson, Racing for profits drives high frequency trading
Horses racing for the prize represent the stock market speed contest to win.
When did high frequency trading begin?
High frequency trading evolved once electronics and computers infiltrated stock markets.
NASDAQ first introduced electronic trading in 1983, then the Securities and Exchange Commission (SEC) accepted active algorithmic trading technology in 2000. As a result, high frequency trading is here to stay.
The stampede of trades and technology rapidly drove execution times from seconds to billionths of a second! In short order, enormous waves of high-frequency trades clipped investors' open market orders.
As a result, those thin slices of profit from numerous clipped market orders became an established part of stock market trading.
See more details, discussion and FAQ in the lesson, Racing for profits drives high frequency trading
What is the problem with high frequency trading?
Programmed or algorithmic trading can increase market risks. Most significant is the amplification of systemic risks. A system glitch can become a spike or dip in a blink.
The built-in tendency to magnify market volatility combines with interconnected markets to make any slight ripple into a wave that races across markets. The result is more investor uncertainty.
The combination of strategies to create trading fog to mislead investors and regular and belligerent use of misinformation obscures and delays factual stock market information for most investors.
For more details, discussion, and other FAQs see the lesson, Racing for profits drives high frequency trading
Does high frequency trading impact the economy?
High frequency trading impacts the economy, markets, and investors.
Using increased trading speed and volume, they effectively create secondary markets for anything that trades in volume. Programmed responses produce flash crashes and spikes that amplify risks and ripple through markets to increase uncertainty.
Any program bug can mean a form, function, or result flaw that impacts the economy and increases downturn risk.
While the data and trading misinformation can erode investor confidence and increase capital costs while imposing more charges, the fake market liquidity and manipulation seem beyond the grasp and resources of regulators.
As a result, it produces costs like an unseen tax on investors and markets.
For more details, discussion, and other FAQs see the lesson, Racing for profits drives high frequency trading
How do you avoid high frequency trading?
Small investors protecting their trade orders avoid the collateral damage of high frequency trading activity. High frequency trading systems seek large institutional trades.
Small investors can protect their orders by setting the price to pay or accept. Never placing an open market order is a small investor advantage over institutional fund managers.
Open market orders are practical for fund managers moving large stock volumes on a specific day or to meet an obligation like a large redemption.
That is the design prey of high-frequency trading systems. But those high frequency trader feasts drive up the net fund costs of the target.
Large fund managers commonly use execution algorithms in the hide-and-seek game to avoid or minimize being that prey.
See more details, discussion, and FAQs in the lesson, Racing for profits drives high frequency trading.
How did high frequency trading become a stock market feature?
High frequency trading is a significant innovation that became a regular market feature with the help of powerful and well-paid inside allies.
Those allies, including exchange managers, gave high-frequency traders access to investor orders, early trading data, and inside market information. That changed markets to favor high frequency trading.
They became a regular market feature with advantages over all others, from small retail investors to the most significant institutional funds. Investors, aware that these changes expose their market orders, can learn to protect them from these trading predators.
The infographic with this lesson traces the history of those market-changing innovations.
See more details, discussion, and FAQs in the lesson, Racing for profits drives high frequency trading.
FAQ about high frequency trading from the lesson, Markets and technology built HFT
What drove the development of high frequency trading?
Deep financial pockets and technology developed high frequency trading to win the stock market race for profits. It was built to be the first to know, trade, buy, or sell.
It was inevitable once NASDAQ introduced electronic trading in 1983, and regulators accepted computer trading in 2000, which opened markets to high frequency trading.
As a result, trading, markets, and investing transformed when High frequency trading algorithms used advances in math, science, computer processing, and communication technologies.
One result was that trade execution times dropped from seconds to nanoseconds, which is well beyond the capabilities of humans.
The combination of technology and money means it is here to stay.
See more details, discussion, and FAQs in the lesson, Markets and technology built HFT
High frequency trading investing strategy does what for me...or to me?
How did high frequency trading get established?
The endless race for profits, technology, and four centuries of stock market evolution created high frequency trading. While the lure of market riches and evolving technology made high frequency trading inevitable, it was huge fees that cemented it in place. Those fees, paid to regulators and exchange management's, ensured high frequency traders got the first privileged access to data as well as essential trading system changes. Made without prior notice to investors, those changes embedded the advantages of high frequency trading over every large or small investor. That stock market technology evolution is illustrated in the infographic included in the linked lesson. See more details, discussion, and FAQs in the lesson, Markets and technology built HFT
How did high frequency trading start?
High frequency trading began in the evolution spurred by investors seeking speed and information advantages over other traders in the four centuries of stock market development. But the current era of high frequency trading began after electronic trading became an accepted part of markets. That development began the electronic and technology race for the fastest systems of communication and trade execution. Those systems, combined with cutting-edge programming, developed into high frequency trading systems. That use of technology changed markets and investing everywhere. See more details, discussion and FAQ in the lesson, Markets and technology built HFT
When did algo or algorithm trading begin?
Algo, algorithm, or computer trading began when NASDAQ introduced electronic trading in 1983. It started quietly but quickly spread in the following years as algorithms or math formulas controlled computerized buying, selling, or holding positions.
As each market enabled it, the technology spread across stock, currency, commodity, option contracts, and cryptocurrency markets.
Already established electronic trading, markets, investments, and investing changed with the introduction of algos. As a result, automated electronic trading systems progressed ever faster in the race for the fastest communication and execution technology.
That evolution accelerated through many steps to become high-frequency trading.
See more details, discussion and FAQ in the lesson, Markets and technology built HFT
What value does high frequency trading provide to investors?
High frequency traders prey on market orders, spread misinformation, increase investor cost, all without investor benefits. High frequency traders pay high stock exchange fees for advantages including colocating servers with exchange trading engines, access to premium market data, and seeing investor orders. These advantages put high frequency traders ahead of all large and small investors! As well, the costs of upgrading exchange technology to cope with high frequency trading speeds and volume, are a tax on all investors. And the feeding frenzy high frequency trader volumes even earn exchange rebates with all benefits going to high frequency traders, exchanges, and even fee collecting regulators, leaving investors with the bill! See more details, discussion and FAQ in the lesson, Markets and technology built HFT
FAQ about high frequency trading from the lesson, Technology powers high frequency trading
Has high frequency trading changed markets?
High-frequency trading technology and deals made with stock exchange management changed markets.
The speed of trading and communication changed from seconds to microseconds, a thousandth of a second, then to milliseconds, a thousandth of a microsecond! In response, trading volumes exploded as spreads between buying and selling prices shrank, but much of it was high-frequency trader-generated phantom misinformation.
The fake production of secondary and liquidity orders mislead markets and investors but vaporize at the first sign of a taker or trouble.
Still, the most significant changes were deals with exchanges to displace investor interests by selling high-frequency traders high-priced first access, putting their technology and trades ahead of all other investors.
For more details, discussion, and FAQ, see this lesson: Technology powers high frequency trading
Advanced communications, computers and programming combine to make our future.
Does high frequency trading use technology against investors?
Yes, high frequency traders use technology against investors, including their colocated servers and priority data access, to front-run any investor's market orders.
As well, they use technology to generate market misinformation by placing phantom orders to mislead investors and manipulate markets at no risk or cost.
And their regular withdrawal of layered or ghost orders shows that their market-making liquidity claims are myths.
High frequency trader activity impacts markets as they can prey on any open market order of all large and small investors.
See more details, discussion and FAQ in the lesson, Technology powers high frequency trading
What technology powers high frequency trading technology?
High frequency trading gets powered by a combination of advanced technologies, access to inside market data, and favorable server positions.
Those technologies include communications, computer processing, and programming, creating trading systems of unmatched speed and power.
Then, because they pay for access and receive prime market data first, their favorably positioned technology processes orders before others can even see the data!
That means exchanges rank high frequency trading opportunities first, ahead of the interests of all other investors. And that changes markets and investing.
See more details, discussion, and other FAQ in the lesson, Technology powers high frequency trading
What is a high frequency trading algorithm?
Algorithms are sets of rules, mathematical formulas, or instructions to calculate the solution for a specific problem. Computer programs can include one or many algorithms that can work independently, in tandem, in series, or all at once to direct and control a trading system.
Each calculation can be a simple one-line instruction, such as 'add this and that number' or a series of complex interdependent functions running to millions of lines.
However, while algorithms can be at the forefront of mathematics and computer science, the cutting-edge technology of high-frequency trading systems involves much more than just complex instructions.
See more details, discussion, and FAQs in this lesson, Technology powers high frequency trading
FAQ about high frequency trading from the lesson, High frequency trading secret exposed!
How did investors learn about high frequency trading?
Before exposure, high-frequency traders tried to operate secretly and hide their activity and advantages from investors. However, persistent investigation, excellent research, and quality reporting uncovered many inside deals and high-frequency trading market rigging secrets.
Investors learned how the technology could pick off a small personal account order or any open order from the largest fund managers. Using high-frequency trading technology, these market predators can take a slice of profit from any market order to impact all investors and markets.
See more details, discussion, and FAQs in this lesson, High frequency trading secret exposed!
60 Minutes superstar reporter, Steve Kroft produced an excellent report detailing how high frequency trading developed and impacts markets.
How were the high frequency trading secrets exposed?
High frequency trading was a secret market rigging scheme until media reports exposed the plot.
The media exposure made their market rigging public knowledge. It took high-quality investigative journalism, built on ongoing in-depth research, to discover the secrets of high frequency trading.
The excellent media work informed investors about how high frequency traders rigged markets and skimmed investor orders. The scheme skimmed profits from trades of huge pension funds or clipped market orders of small individual investors.
See more details, discussion, and FAQs in the lesson, High frequency trading secret exposed!
Does high frequency trading affect low frequency trading?
Yes, high frequency trading can affect all market orders including those of individual retail investors. Market changes let high frequency trading access, prey on, and skim any market order. But knowledgeable investors can eliminate that high frequency trading advantage by switching from market to protected orders. In contrast, large fund managers do not protect their market orders. However, small investors have that advantage over institutions and large funds. As well as individual investors, low frequency trading can also include computers programmed for low frequency trading. Their algorithms trade on longer-term market movements but any market orders generated are also affected by high frequency trading. See more details, discussion and FAQ in the lesson, High frequency trading secret exposed!
Is the stock market rigged by high frequency trading?
Yes, call it rigged or taxed, high frequency trading changes markets and investing. But consider, market rigs, manipulation, and cheating have always been parts of markets and investing. High frequency traders exploit the latest technology for their own advantage. But all through the centuries of stock markets, investors searched for and used technology for an edge. So as wise investors always have, we respond by informing ourselves and learning what actions to take to minimize high frequency trading effects. See more details, discussion and FAQ in the lesson, High frequency trading secret exposed!
How can high frequency trading hurt investors?
High-frequency traders leverage technology and paid-for inside information to profit from skimming investors' orders.
Their scheme targets large market orders of institutional funds and financial advisors but will pick off any individual open market orders.
Wise investors who avoid open market orders can evade these costs.
See more details, discussion, and FAQs in this lesson, High frequency trading secret exposed!
FAQ about high frequency trading from the lesson, Laws and ethics beat investors
Who regulates high frequency traders?
Several authorities or regulators oversee securities trading, including high frequency trading. That includes national jurisdictions such as the Securities and Exchange Commission (SEC) governing U.S. markets and securities and the Commodity Futures Trading Commission (CFTC) regulating U.S. derivatives, including futures, swaps, and options markets.
In all jurisdictions, authorities also regulate brokerage firms. In addition, the exchanges have regulatory responsibilities, as do the individual brokerage firms that must follow and enforce rules to guide and control client activity.
Generally, each country's senior national regulator sets the tone and overall regulatory environment and ultimately answers to the legislature and political leadership.
See more details, discussion and FAQs in the lesson, Laws and ethics beat investors
A blurry image of blind Lady Justice holding the scales of evidence represents indifference to the harm of bad law.
Is high frequency trading legal?
While called market-rigging and unfair, since no law prohibits high frequency trading, it is legal. However, the question of ethics looms large as investors are preyed on by this predatory practice.
High frequency traders tilt the market in their favor with the help of stock exchange managers who prefer their high fees over the welfare of investors. The clever exploitation of exchange rules, regulations, and laws gave them access to investor orders.
Big bucks twisted insiders to support changing trading practices, regulations, and accountability to favor high frequency trading over the interest of large and small investors.
See more details, discussion, and FAQs in this lesson, Laws and ethics beat investors
How can the law, ethics, and culture support high frequency trading?
Money talks! And high frequency traders certainly know how to use it well! In addition, they did the homework needed to line up and use rules, laws, and business culture against investors. Money, paid through high fees, convinced exchange managements to change operations, systems, and priorities to give high frequency traders preference over investors. Those changes included inside access to exchange trading systems and the first use of prime market data. Those behind-the-scenes changes turned high frequency traders loose to freely feed on the market orders of large and small investors. Past norms of fair trading, old-fashioned law, and ethics were left in the dust. See more details, discussion and FAQ in the lesson, Laws and ethics beat investors
Is high frequency trading unethical?
According to some who cite markets tilted to favor the scheme with their unfair trading advantages and market manipulation, high frequency trading is unethical.
While laws and regulations set expectations in health, safety, employment, and environmental standards, moral and ethical challenges are something else. Evolving moral and ethical issues will continue challenging investors, service providers, market management, and regulators.
The linked lesson explores this issue in some detail.
For more details, discussion and FAQ see this lesson, Laws and ethics beat investors
FAQ about high frequency trading from the lesson, Market management burns investors
How vital is high frequency trading to financial markets?
By skimming open market orders, high-frequency traders extract profits from tiny price fluctuations in thousands of transactions. That adds costs for investors like any transaction or access fee.
High-frequency traders cleverly agreed to pay lucrative fees for exchanges, financial service providers, and regulators to cut them in on the scheme despite being based on illusory concepts of market-making liquidity, market depth, and reduced volatility.
That inside arrangement ensures that the significant revenue of high-frequency trading continues to be an integral part of markets.
See more details, discussion, and FAQs in this lesson: Market management burns investors
Flames cooking investors as market management burns investors.
Do stock markets support high frequency trading?
Stock markets made structural and priority changes that favored high frequency traders at the expense of investors. It happened when implementing technology and policy changes earned massive fees that gave high-frequency traders access to investors' market orders.
While modifications were in progress for years, they swiftly materialized following the 2008 financial crisis when the NYSE accommodated high frequency trading. After that, widespread adoption progressed to many markets.
Now, interconnected markets ensure the impact of high frequency trading influences them all.
See more details, discussion, and FAQs in this lesson, Market management burns investors
What are the benefits of high frequency trading?
High-frequency trading siphons millions of dollars from the daily order flow, leaving investors with hidden costs.
When their covert scheme was exposed, high-frequency trader misinformation deceptively claimed investors benefitted from the speed, volume, swift execution for market-making, enhanced price efficiency, deeper liquidity, and narrower bid-ask spreads.
The illusory liquidity has no substantial capital backing and vanishes at the slightest hint of trouble. That is not market-making.
But their misinformation haze obscures the profit skim taken from the open market orders of countless investors. Despite known spoofing, layering, and market manipulation, high fees buy and keep inside allies and regulators onside to ensure the scheme continues.
For more details, discussion, and FAQs, see the lesson, Market management burns investors
Has high frequency trading ruined the stock market for investors?
No, not for smart informed investors that continue to do very well investing in stock markets. Successful investors have the knowledge and skill needed to deal with high frequency traders who use technology to prey on investor orders. Superior investors use the skills learned in this course to manage their orders and avoid the high frequency trading ambush. By learning to stay out of the high frequency trading line of fire, informed investors keep safe as they continue stock market wealth building. For more details, discussion and FAQ see the lesson, Market management burns investors
Who pays for stock exchange servicing high frequency trading?
The costs of stock market operations are like a tax all investors pay. As a result, investors paid billions to cover the costs of accommodating high frequency trading.
Still, only high frequency traders and their well-paid inside allies benefit from enabling those schemes.
In exchange for high fees, exchanges reordered their systems and business practices to become essential parts of the money-making plot.
Consequently, advantages given to high-frequency traders are a sell-out of market integrity, fairness, and honesty for a scheme that can exploit market orders of large and small investors.
As a result, sharp investors must learn to understand the impacts of high frequency trading and develop ways to deal with it.
See more details, discussion and FAQ in the lesson, Market management burns investors
Who costs do high frequency trading impost on investors?
High-frequency traders pay exorbitant fees to position their servers next to exchange trading engines and give them access to trading data before investors.
These fees turned stock exchanges into willing accomplices in the high-frequency trading scheme, leaving ordinary investors to pick up the tab.
All investors bear the costs but receive no benefits from improving exchange systems to cope with the speed and volume of high-frequency trading.
See more details, discussion, and FAQs in this lesson, Market management burns investors
Why do stock markets allow high frequency trading?
Stock markets that allow high frequency trading can collect lots of money! High fees are collected for the colocation of high frequency trading servers within the exchange systems. As well, huge new revenue streams come from providing first access to all market trading data. Because money talks, systems, and policies were changed to favor high frequency trading. High tolls for those new high frequency trading services became major exchange money makers. But the changes also impact investors. Those changes expose investor orders to make them easy pickings for high frequency traders. That, along with market priority shifts, changed markets. As a result, they tilted against investors, and that changed markets and investing. See more details, discussion, and FAQ in the lesson, Market management burns investors
FAQ about high frequency trading from the lesson, High frequency trader 3-Way ambush
Did stock exchanges make changes for high frequency traders?
Exchanges made two significant changes for high-frequency traders that affect investors and investments.
First, exchange structural and operating priorities shifted to favor high-frequency traders, including the order and speed of processing.
Second, high-frequency traders get preferred access to exchange engines, which allows them to impact markets and investors directly.
They also get first access to the data flow and privileged order processing, which directly affects the market orders of both institutional and individual investors.
As a result, high-frequency traders can take a slice of profit from market orders, degrade real liquidity, and lower the quality of price information, affecting both institutional and individual investors.
See more details, discussion, and FAQs in this lesson: High frequency trader 3-Way ambush
3 Soldiers ready to ambush are like the 3-Way fix high frequency traders use to ambush investors.
Do high frequency trading strategies affect the market?
High frequency trading does impact markets. The impacts include overloading exchanges with phantom trade messages, always pushing to the front of the order flow line, keeping posted prices out of investor reach, running from turbulence, displacing real market makers, stressing market liquidity by creating the liquidity mirage, pushing credit risks and degrading the quality of price information. With high frequency trading, price volatility spikes and dips have become routine, especially in large capitalization, high volume markets. For more details, discussion and FAQ see the lesson, High frequency trader 3-Way ambush
How does high frequency trading increase risk?
The rapid speed and volume of high-frequency trading can magnify risks already in the financial system. Market manipulations from technology-boosted high-frequency trading can intensify even small market movements across interconnected markets.
In addition, high-frequency traders regularly rapidly add and remove orders, which generates more misinformation that increases risk and adds uncertainty to confuse investors.
Moreover, their common practice of triggering stop-loss executions for investors, combined with program errors or execution blunders, adds risks that further undermine market integrity.
See more details, discussion, and FAQs in this lesson: High frequency trader 3-Way ambush
What is the net effect of high frequency trading?
High-frequency traders leverage their edge over other investors by using technology and privileged access to gain trading advantages that amplify risks and uncertainty across interconnected markets.
Specific HFT strategies can manipulate market fairness and impact liquidity, volatility, price efficiency, and market stability depending on market conditions and regulatory oversight.
Algorithm, strategy, or execution errors can amplify market dips or spikes. The net result is that high-frequency trading benefits those in the scheme while acting as a tax on all investors' open market orders.
See more details, discussion, and FAQs in this lesson: High frequency trader 3-Way ambush
Do exchange managements favor high frequency trading?
To collect high fees, exchanges seeking to grow their revenue and profit embraced high frequency traders. However, those high fees came with the requirement of significant changes to hardware and services to exploit the open market orders of unsuspecting investors.
As a result, high frequency traders began skimming billions of market orders, although, at the time, few comprehended how this fundamentally altered investing and markets.
While not the initiator, the NYSE's embrace of high frequency trading paved the way for its widespread acceptance by many exchanges.
Consequently, these changes continue the three-way fix that enriches high-frequency traders and exchanges at the expense of all investors.
For more details, discussion, and other FAQs, see the lesson, High frequency trader 3-Way ambush
FAQ about high frequency trading from the lesson, Fair and foul high frequency trading
Does high frequency trading make money?
High frequency trading schemes have produced billions in profits. They quickly dominated the arbitrage game in many markets by leveraging their technological advantages.
But their lightning-fast trade executions let them take a small cut from thousands of market orders per second, resulting in staggering sums. Many gains come from skimming their prime targets, the large institutional investors with billion-dollar funds.
Managers of those funds routinely use an unending parade of open market orders. Those orders are the prime hunting grounds for high-frequency traders to generate their stream of profits by feeding on the money of countless small investors.
See more details, discussion, and FAQs in this lesson, Fair and foul high frequency trading
How profitable is high frequency trading?
In favorable market conditions, high frequency traders make lots of money! And favorable conditions occur with virtually any market movement or change in price or volume. Any price change triggers a latency arbitrage, the bread and butter play for high frequency traders. It also means any real investor market order presents high frequency traders with a profit-making opportunity. As a result, in active markets, high frequency traders can produce millions in profit by feeding on market orders. For more details, discussion and other FAQs see the lesson, Fair and foul high frequency trading
High frequency trading hides fair and foul moves in arbitrage plays.
What is arbitrage trading?
Arbitrage trade is a strategy that involves buying low in one market and selling high in another to take advantage of price differences. This strategy can be used in any market, but it is most effective across multiple markets.
Even though electronically interconnected markets update quickly, any change in price made by a buyer or seller can create an arbitage opportunitye.
This split-second price difference is what computerized automated trading systems, like high-frequency trading, take advantage of to make a profit.
For more details, discussion, and other FAQs, see the lesson: Fair and foul high frequency trading
Does high frequency trading change the arbitrage trade?
In financial markets, high-frequency traders have revolutionized the way arbitrage trading works. They can capitalize on profit opportunities before other investors become aware of them!
That happens because they can access systems that receive and send data much faster than anyone else, giving them a timing and information edge.
As a result, technology-driven systems have taken over arbitrage trades, putting other traders at a disadvantage.
See more details, discussion, and FAQs in this lesson: Fair and foul high frequency trading
Do high frequency traders dominate arbitrage trades?
High-frequency traders do dominate arbitrage trading.
It happened as soon as markets accepted the unmatched trading speed and front-running capability of high-frequency trading. Those advantages put them beyond the reach of any human investor.
Now, investors steer clear of arbitrage trades to avoid having their pockets picked.
For more details, discussion and other FAQs see the lesson, Fair and foul high frequency trading.
How do high frequency traders play arbitrage trades?
High-frequency traders use their incredible speed advantage in arbitrage trading to extract money from markets and investor pockets.
They get to the arbitrage trade finish line before others even know there could be a race! It is their technical and insider advantages that let them dominate arbitrage trading.
As a result, latency arbitrage trading has become an essential and reliable profit producer for high-frequency traders.
For more details, discussion, and other FAQs, see the lesson, Fair and foul high frequency trading
FAQ about high frequency trading from the lesson, High frequency trading strategies, risks and regulations
Does high frequency trading change investing?
High-frequency trading has changed investing and markets in large and small ways. As a result, the effects of high-frequency trading strategies, risks, and regulations have cascaded across all markets.
Although risks are part of any market, stock exchange management decisions and technology-tilted markets favor high-frequency trading interests above all others.
Those advantages, including the first and fastest connections to markets, premium trading data, and access to all investor market orders, put high-frequency traders ahead of any large or small investor's market orders.
In response, sharp investors changed how they place and control their trading orders to minimize the impact of high-frequency trading.
See more details, discussion, and FAQs in this lesson: High frequency trading strategies, risks and regulations
Does high frequency trading affect markets?
Yes, the activity, risks, regulations, and strategies of high frequency trading impact markets.
Management of exchanges changed policies, processes, and technologies to favor high frequency trading over large and small investors.
That gave high frequency traders an advantage, but aware investors can take steps to protect their investment orders from high frequency traders.
See more details, discussion, and FAQs in this lesson, High frequency trading strategies, risks and regulations
This neon Change sign indicates high frequency trading strategies depend on investor and market movements. HFT needs opportunity creating change to produce profit.
What risks come with high frequency trading?
Three significant market risks and flaws of high frequency trading include:
1. Pushing price dips and spikes to skim profits increases systemic market risks.
2. The increased volatility ripples across interconnected markets.
3. Misinformation streams of false prices and ghost orders mislead markets and increase uncertainty.
Repeated direction pushes, volatile swings, and misinformation erode confidence and market integrity as high frequency traders, their trolls, and bought allies amplify public market misinformation.
See more details, discussion, and FAQs in this lesson, High frequency trading strategies, risks and regulations
Does high frequency trading provide liquidity?
Liquidity is added by any volume, including from high frequency trading. However, high frequency traders misrepresent that volume as market-making liquidity.
They spin that nonsense to mislead investors and market watchers. Real market-makers step up to provide volume regardless of the circumstances. That is especially important when other orders dry up.
But in any market disruptions, high frequency traders instantly flee for cover, providing no market-making liquidity. That doesn't stop the high frequency trading minions from endlessly chirping self-serving misinformation.
See more details, discussion, and FAQs in this lesson, High frequency trading strategies, risks and regulations
Does high frequency trading affect individual investors?
High frequency traders can take advantage of any market order of large to small investors.
Therefore, their activity affects all investors and traders across markets. That includes investors managing the most significant pension and institutional funds to minor retail investors.
Additionally, their participation in rebate programs increases their profits, while technological speed and execution advantages can affect all market orders.
As a result, the answer is yes, high frequency trading impacts all individual investors.
See more details, discussion and FAQ in the lesson, High frequency trading strategies, risks and regulations
FAQ about high frequency trading from the lesson, Misinformation myths of high frequency trading
What are the misinformation myths of high frequency trading?
High-frequency traders often deceive the market and mislead investors by spreading disinformation, like the nine examples in the linked lesson.
They claim to provide market-making liquidity and take credit for reducing spreads. However, investors bear the costs, including the skim taken from investors' market orders and the structural market expenses of accommodating high-frequency trading.
Although all investors pay the costs, only high-frequency traders benefit from them.
See more details, discussion, and FAQ in the lesson: Misinformation myths of high frequency trading
High frequency trading misinformation myths can overwhelm investors like this woman who covers her ears.
How do high frequency traders use misinformation?
High frequency traders use misinformation, disinformation, and myths to mislead and confuse investors. For example, aggressive high frequency trading propaganda claims their advantages support markets. But they feed on market orders to pick investor pockets under regulators’ noses. Their misinformation presents markets and high frequency trading as too complex for mere mortal retail investors to understand. Already well-established electronic trading benefits like increased liquidity and shrinking spreads predate any innovation of high frequency trading. But high frequency traders spin the illusionary claim of providing such benefits. See more details, discussion, and FAQs in the lesson, Misinformation myths of high frequency trading
Does fake news from high frequency trading impact markets?
Yes, high frequency traders can impact markets by generating fake news. That and misinformation from all sources constantly challenges the fairness and stability of financial markets.
For that reason, investors must develop an effective information filter to catch misinformation from unreliable or misinformed sources and separate opinions and rumor mill noise from the facts.
Experienced investors learn to guard against misinformation and the dastards of deceptive disinformation.
That noise includes pump and dump scammers, high-frequency trader spoofing, and quote stuffing intended to misinform.
See more details, discussion and FAQ in the lesson, Misinformation myths of high frequency trading
Do high frequency traders benefit anyone but themselves?
High-frequency traders prioritize their profits over the interests of other market participants. Any positive impact on the market or investors is merely incidental.
Initially, high-frequency trading techniques were hidden from the public as an insider's secret until a curious trader and an investigative journalist uncovered them. After the revelation, high-frequency traders spread misinformation, falsely claiming their actions benefit all traders and investors.
However, the idea that high-frequency trading benefits the market and investors is part of the self-serving market myths of high-frequency traders.
See more details, discussion and FAQs in this lesson: Misinformation myths of high frequency trading
Is high frequency trading good for capital markets?
Good or bad, the debate and manipulation continue. Without question, there are negative effects. Before high frequency traders invaded markets, electronic trading had established a record of narrowing price spreads and sharply increasing the market pace. When high frequency trading arrived, those already well-established developments were spun as high frequency trading benefits. Those claims distracted attention from high frequency traders preying on and skimming profits from investor market orders. As well, the costs of changing operations and the system to benefit high frequency trading got dumped on all investors. It is like a tax imposed without benefit. See more details, discussion, and FAQ in the lesson, Misinformation myths of high frequency trading
FAQ about high frequency trading from the lesson, Markets, technology, and laws respond to high frequency trading
Has anyone responded to high frequency trading?
Responses to high frequency trading have come from many individual investors, investment professionals, regulators, exchanges, financial service players, and endless media reports. They range from sharp criticism to cheerleading, but, in practical terms, the responses mean little. Responses vary but in real terms, nothing happens. High frequency trading is here to stay, do as it wishes, and affect investor money and trades. Although, some markets, technology, and laws have replied with trading speed bumps, taxes, and an entirely new stock exchange established that removes the high frequency trading advantages. By neutralizing inside advantages, that exchange brings market forces to address the issues. See more details, discussion and FAQ in the lesson, Markets, technology, and laws respond to high frequency trading
Market forces, speed bumps, taxes and high frequency trading could change markets. As responses to rigged markets, speed bumps, regulations, lawsuits and taxes target HFT.
Do all markets ignore high frequency trading risks?
No, but market responses to high frequency trading vary by jurisdiction from those who are an associated ally, to indifference, or complete bans. Most markets have concerns about the possibility of market disruptions. As a result, in some markets a “kill switch” allows any member firm to turn off trading should a preset risk exposure get hit. Other markets using trading circuit-breakers, first introduced in 1987, to stop any trading panic, have updated to cope with high frequency trading. Proposals that high frequency traders code risk controls into their algorithms have little chance of success. See more details, discussion and FAQ in the lesson, Markets, technology, and laws respond to high frequency trading
How have markets responded to high frequency trading?
High fees bought support for high frequency traders from major markets and other powerful allies to ensure high frequency trading advantages over large and small investors. In contrast, other markets introduced restrictions like technology speed bumps or made efforts to attract opposing market forces, and some introduced a fee or tax on trades. As more investors, regulators, and legal minds pay attention, additional responses to market rigging by high frequency trading are possible. But don’t hold your breath waiting. For now, responses vary from doing nothing to establishing an entirely new stock exchange that avoids and prohibits giving high frequency traders any advantages. Possible changes being considered may affect future trading and investment results. See more details, discussion and FAQ in the lesson, Markets, technology, and laws respond to high frequency trading
Will high frequency trading get regulated?
Regulation of high frequency trading varies by jurisdiction. Some completely ban it, others have restrictions, some with few controls or conditions, but the balance, including major exchanges, participate as allies sharing in the bounty through high fees paid for inside access and advantages. However, the debate continues to ban or impose more restrictions or controls on high frequency trading. Like most changes in regulations, any further change will likely be slow to arrive. See more details, discussion and FAQ in the lesson, Markets, technology, and laws respond to high frequency trading
Does high frequency trading manipulate markets?
High-frequency traders manipulate markets using their inside access, unmatchable technology-powered speed, vast order quantities, and massive trade volumes, distorting prices and creating unfair advantages.
Front-running happens when HFT orders get placed at the front of the line after knowing the orders of all others. Spoofing and quote stuffing flood the market with many orders to create confusion or slow down other traders' systems.
Their misinformation production and calculated strategies disrupt markets' integrity, fairness, stability, and quality. They use a manipulative trading strategy, banging the close, affecting prices and market quality.
See more details, discussion, and FAQs in this lesson: Markets, technology, and laws respond to high frequency trading
FAQ about high frequency trading from the lesson, Investors deal with high frequency trading
Who is high frequency trading good for?
High frequency trading clips profit from investors' orders but leave costs behind. The privileged inside positions of high frequency traders happened when they bought the loyalty of powerful allies.
By paying high exchange fees, they could locate servers inside exchanges for the earliest access to trade data and priority exchange services for unmatched advantages over investors.
Then, combined with the unequaled speed and volume of their powerful technology, high frequency traders can get in front of any trade they want.
That means, at a cost to other investors but without benefit, high frequency traders can exploit the latency or time delay that happens with every bid or ask price change. See more details, discussion, and FAQs in the lesson, Investors deal with high frequency trading
Investors can learn how to stop giving high frequency trading their money.
How do investors deal with high frequency trading?
Order management can help investors protect their portfolios from the predatory tactics of high-frequency traders.
The limit order gives small investors an advantage and a practical alternative to an open market order. Best of all, it can stop high frequency traders from taking a skim of profit, raising the cost of a trade.
That is an option denied to large fund managers because of their size and need to routinely quickly and efficiently move large share blocks. For them, limit orders are slow and cumbersome which leaves them vulnerable to high-frequency traders.
See more details, discussion, and FAQs in this lesson, Investors deal with high frequency trading
How do you avoid high frequency trading?
No-Worry Investors following four steps can avoid the impact of high-frequency trading.
First, they learn about and understand high-frequency trading.
Second, they use their small investor advantages.
Third, they never make an investment using open market orders.
Fourth, they price research to use only set price orders for all trades.
Using limit orders, No-Worry investors leverage their advantage over large funds and avoid the price impact of high-frequency traders.
See more details, discussion, and FAQs in this lesson: Investors deal with high frequency trading
Who uses high frequency trading?
Dedicated or purpose-built companies were the first to use high frequency trading technology as their core business. As the technology became established those firms were joined by large investment banks, hedge funds, and institutional investment trading firms. Using high frequency trading technology and systems is not for triflers or small investors as the financial barriers to entry are beyond most investors. That means it is open to large companies to profit at the expense of “little guys,” including institutional funds and retail investors. See more details, discussion and FAQ in the lesson, Investors deal with high frequency trading
Who pays the stock market costs of high frequency traders?
The overall costs of stock market operations are like a tax paid by all investors. As a result, the billions in costs to accommodate high frequency trading get spread across markets and paid by all investors, but only benefit a few. Those few are the high frequency traders and their well-paid allies who enable their scheme. Exchanges set up and continue to collect high fees for reordering their business and systems as essential parts of the money-making plot. As a consequence, the advantages given to high frequency traders are a sell-out of market integrity, fairness, and honesty for a scheme that exploits market orders of investors large and small. As always, sharp investors first learn to understand it and then develop ways to deal with it. See how and more details, discussion and FAQ in the lesson, Investors deal with high frequency trading
Why is high frequency trading bad?
Insiders manipulated markets to give high-frequency traders unfair advantages over other investors. As a result, investors using open market orders get their pockets picked, and all investors pay the costs of accommodating high-frequency traders.
The main targets of these predators are open market orders of institutional fund managers. In contrast to the major funds that routinely use open market orders, well-informed small investors can avoid these pocket pickers.
While the predators are happy to take a slice of any exposed investment order, they prefer the large size and volume of the institutional orders.
Still, this predatory pocket-picking increases costs for all investors. So wise investors inform themselves and learn how to deal with it.
See more details, discussion, and FAQs in this lesson: Investors deal with high frequency trading
Should everyone stay out of markets rigged by high frequency traders?
Stock market rigging doesn't mean you can't make stock markets work as your wealth-building tool. Knowledgeable investors can make lots of money in stock markets.
We know bears and cougars are in the forest, stinging jellyfish are in the ocean, drunk and distracted drivers are on the road, and online scams happen. So, we learn to be careful, to inform, and protect ourselves.
In the same way, investors can learn how to deal with and avoid the impact of high frequency traders. That helps them become successfully use stock markets as their wealth-builders.
See more details, discussion and FAQ in the lesson, Investors deal with high frequency trading
Additions and edits to FAQ about high frequency trading will happen as needed
White Top Investor course:
High frequency trading explained, lesson links:
Introducing high frequency trading explained Lesson 1
Racing for profits drives high frequency trading Lesson 2
Markets and technology built HFT Lesson 3
Technology powers high frequency trading Lesson 4
High frequency trading secrets exposed! Lesson 5
Laws and ethics beat investors Lesson 6
Market management burns investors Lesson 7
High frequency trader 3-Way ambush Lesson 8
Fair and foul high frequency trading Lesson 9
High frequency trading strategies, risks and regulations Lesson 10
Misinformation myths of high frequency trading Lesson 11
Markets technology and laws respond to high frequency trading Lesson 12
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