What Is Crypto High-Frequency Trading (HFT)？

Introduction

There are a variety of trading techniques behind different portfolios for users who have been in the crypto market for a long time. High-frequency trading (HFT) is one of the few techniques that allow users to maintain a competitive advantage in the market.

The application of HFT in the crypto market is multifaceted. We must learn more about it because it may work for some people but not for others.

What Is Crypto High-Frequency Trading

High-Frequency Trading (HFT) uses algorithms to process a large number of orders in a short period of time. It can also use algorithms to evaluate various market conditions and execute corresponding orders based on market conditions.

In general, in the volatile crypto market, the faster the order execution, the better it is for the user. After all, it is a strong guarantee for users to make large-scale crypto asset transactions instantly, after making a judgment on the market situation with various information.

The existence of a trading market supported by a consensus of value allows intermediaries who provide services for the liquidity of such assets to profit from it, which is necessary for a healthy crypto market since all types of crypto assets are worthless if no one is willing to buy them. HFT is crucial to the functioning of the many exchanges that provide varying degrees of service for a fee.

At this stage, the crypto market follows a set of rules derived from the trading mechanism of the stock market, which has been refined over more than a century and has borrowed many of the tools from it. High-Frequency Trading (HFT) is one of them; however, unlike in the traditional market, HFT in the crypto market needs to be more related to the technical principles of different crypto assets. which is commonly understood to mean that in order to trade HFT in the crypto market, the access conditions of multiple contracts and trading paths.

HFT has become more complex in the crypto market than in traditional markets. HFT is powered by computer algorithmic tools known as “algorithmic robots,” which can process large orders at near-instantaneous intervals, allowing users to profit from small movements in the market. HFT in the crypto market serves the same function as it did before; it allows users to trade with minimal effort by automatically opening and closing positions every second and using a variety of trading algorithms to track even the tiniest price fluctuations.

What are the features of High-Frequency Trading?

One of the central tenets of high-frequency trading is the rapid identification of profitable opportunities. Its main disadvantage is that long-term performance may be outperformed by value investors who hold assets for a long period of time. In contrast, the advantage is efficient capital use in a short period of time and manageable risk.

High-frequency trading has a number of features：

• It creates and automates order execution using advanced and fast-processing programs；
• It can effectively reduce latency and potential delays in data flow by utilizing exchanges and other third-party hosting services；
• It can open and close monetary orders in a very short period of time；
• It can submit a large number of order transactions at once；
• it can effectively hedge market risk and make profits in a short period of time.

High-frequency trading has become an essential part of the structure of all markets since its introduction in the late 1990s. However, the algorithms and tools used behind it are the primary reason for the success of such market strategies, which has led to the fact that HFT is not always particularly friendly to retail investors, as “algorithmic robots” are always in an iterative development process, making it difficult for retail investors to outperform these much faster competitors in the market.

However, this is both an advantage and disadvantage of high-frequency trading, which we will discuss in more detail later.

How Does High-Frequency Trading Work?

First, the HFT process involves a great deal of automation, where the computers used for high-frequency trading are programmed to host complex algorithms that can typically track and analyze cryptocurrencies on many exchanges in the market in a matter of seconds (HFT selects the corresponding cryptocurrencies according to the objects set up in advance).

In this context, the algorithm developed by the trading experts effectively detects trends of the corresponding cryptocurrency, and once the analysis is completed, the application automatically and quickly executes the corresponding order actions. The “algorithmic robot” will typically use multiple accounts to open long or short orders on various exchanges, and the price of the corresponding cryptocurrency chosen by HFT will be adjusted accordingly.

As you can see, the algorithm behind high-frequency trading is usually based on both price moves and trading on the opposite side to trigger a large number of automated trades, which in turn have an impact on the market trend of a certain type of cryptocurrency, it is not simply a trading tool for buying and selling in large quantities, but also for long and short market behavior.

And, contrary to popular belief, the “algorithmic bots” that serve as HFT’s counterparts have evolved over time to be able to collect a large amount of information outside of the market, and they can now trade based on trend speculation and market news. But in more cases, high-frequency trading is still primarily based on the impact of a large number of trade orders on the price changes of the corresponding cryptocurrencies, as well as a more accurate projection of their high price levels in many cases.

HFTs’ algorithms can also read real-time data feeds, store trading signals, and find arbitrage opportunities by analyzing bid-ask spreads with bilateral orders, among other things. Advanced algorithms can even anticipate large orders by monitoring smaller trading orders and analyzing their patterns and trading times; this data can then be used to adjust prices in order to fill cryptocurrency volumes using a large number of pending orders.

Such a comprehensive and intelligent technology is indeed not something that the average retail investor can adopt, which is one of the reasons why high-frequency trading is not friendly to them. However, the liquidity opportunities in the crypto market that HFT is targeting require the slightest data latency. As a result, HFT is usually used by professional investment institutions and requires the fastest computers, including expensive hardware.

However, the liquidity opportunities in the crypto market that HFT is targeting require that the institution employing it does everything possible to minimize even the slightest data latency. Since HFT necessitates the most powerful computing computers, which necessitates frequent and expensive hardware upgrades, it is typically used by professional investment institutions.

Because of the large number of investment institutions that use HFT algorithm technology, they have to place high-cost equipment as close to the exchange servers as possible in order to obtain data information faster, avoid delays, and improve the efficiency of the algorithm by accessing real-time data feeds.

Let’s take a look at the advantages and disadvantages of high-frequency trading strategies as well as the risks that the application of such a strategy brings to the market.

The Benefits of HFT

Speed:

A wide range of traders prefers high-frequency trading for its high speed as well as automated orders that can generate large order amounts in a very short period of time and do not require manual identification of market opportunities.

Accuracy:

High-frequency trading employs sophisticated algorithmic techniques to handle the trading process and analyze various information inside and outside the market, effectively eliminating human error. As a result, the likelihood of making poor decisions due to the influence of FOMO decreases.

Liquidity:

High-frequency trading is able to drive the entire crypto market to consistently generate gains over time, and despite the possibility of price manipulation, it does help traders identify price highs to drive price movement.

HFT’s Limitations and Risks

High risk-to-reward ratio: HFT has a higher risk-to-reward ratio than traditional trading strategies.

Vulnerable to fraud: HFT is vulnerable to fraud because of the low variability of different algorithms. Many HFTs with weak algorithms are likely to be cracked, resulting in fraud problems.

Ghost Liquidity: Unusual trades or hundreds of orders placed and then canceled by the algorithm fall into the category of possible algorithm uses. For example, an exchange may delay information transmission to HFT or use periodic batch auctions rather than continuous order flow.

In fact, it is easy to identify some of these issues from the pros and cons of high-frequency trading, which ideally requires minimal latency and maximum automation, which means that professional firms using HFT algorithms prefer exchanges with high levels of automation for trading, which in turn drives the high dominance of high-frequency trading in the crypto market.

Trading liquidity is becoming more common as high-frequency trading is increasingly used in the crypto market. While increased liquidity is beneficial to the crypto market, there is a cost associated with the use of HFT, and the difference between benefit and cost influences the market commitment of professional investment institutions that use HFT algorithms.

When exchanges hire HFT specialist firms to build their markets, they are given access to the exchange to upload orders, allowing them to see the trading volume within the exchange before they can influence the market using HFT, which is very unfriendly to other investors and users within the exchange.

If it appears that a specific cryptocurrency is being purchased in large quantities on the same exchange, investors using HFT may bid to purchase the corresponding cryptocurrency from other exchanges in order to sell it at a higher price later. This behavior of paying for a trading advantage does not necessarily bring liquidity gains to the market but rather leaves one cryptocurrency after another and the retail investors who entered the market. The issue is that cryptocurrencies and retail investors who have entered the market are in jeopardy

Of course, as mentioned in the previous article, the most significant risk impact of high-frequency trading on the market and investors is its dissuasive effect on the average investor. Because no one wants to compete with bots that trade in milliseconds, this is a serious blow to cryptocurrency users’ confidence, and the result is a shrinking market. It is critical to understand that competing with HFTs has a high cost and that competing HFTs can result in false quotes and “spoofing,” which create trades to attract other algorithmic bots, with uncontrollable consequences.

While high-frequency trading remains profitable for the time being, it does not add value to the crypto market, and while competition has led to advancements and iterations in algorithmic technology, HFT profitability has not increased significantly in the face of increasing transaction speeds. Finally, the expansion of user size and the entry of more capital will drive the value of the crypto market higher. This is not to say that the impact of high-frequency trading on the crypto market is negative. With algorithmic analysis and high-frequency order trading speed, the likelihood of the crypto market as an emerging market benefiting from the high-risk HFT application is very high, as it is pushing the entire market towards a more comprehensive as well as automated direction, which will serve as the foundation for subsequent market scale expansion.

How to Apply High-Frequency Trading in Crypto Markets

High-Frequency Trading strategies in crypto markets actually derive more from their experience in traditional financial markets, and here are a few commonly used available strategies that are recommended.

Market-Making Opportunities

The most basic strategy for implementing High-Frequency Trading in the crypto market is to create a market by placing a large number of orders, analyzing market prices and trends of various cryptocurrencies, determining a speculative trading strategy, and then pushing the price of a specific currency up through inquiries and bids, as well as buying and selling, so that traders can profit from the bid/ask spread and help to provide liquidity to the crypto market.

Arbitrage Opportunities

High-Frequency Trading is able to simultaneously access liquidity pools, select the best order routing and enhance order execution. Crypto arbitrage is the practice of speculating on the price difference of the same cryptocurrency across multiple exchanges. For example, one Bitcoin may simultaneously cost $20,100, on one exchange and $20,050 on another. Besides detecting arbitrage opportunities, HFT platforms can open multiple positions and conduct trades hundreds of times faster than any human trader can.

Short-Term Opportunities

High-Frequency Trading allows multiple orders to be effectively traded in real time using devices with fast algorithmic transaction processing capabilities.

Conclusion

High-Frequency Trading is currently one of the frontiers in crypto exploration. While its use in traditional markets has sparked much debate, it has also created numerous opportunities. HFT has become more complex in terms of technical principles in the crypto market, and its security has also improved, but the exact form of HFT has not yet been determined, and its main application is to be attached to exchanges or market makers.

Overall, the effectiveness, speed, and application of advanced algorithmic programs determine the role of high-frequency trading in the crypto market. By studying cryptocurrency trends, these algorithms can buy, sell, and trade multiple times per second, resulting in incremental profits through increased trading volume. It is a trading strategy that employs algorithmic techniques.