Trading Tutorial For Dummies

If you want to learn how high frequency trading works, you have come to the right place. High-frequency trading algorithms now account for between 50% and 70% of all transactions that take place on the market. These transactions are not carried out by a human being or as a result of a human decision. They are performed by an algorithm at a speed and scale that are beyond our understanding.

If you are interested in high frequency trading (HFT), then this high frequency trading tutorial is for you!

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High Frequency Trading Tutorial-How It Works

What is high-frequency trading?

In essence, high-frequency trading, or HFT, is a fast trading through the use of very powerful computers. The high-frequency trading algorithm has a negligible advantage in the market, as it allows you to trade extremely quickly.

To understand our tutorial on high frequency trading, you need to understand the terminology used by HFT traders:

• Collocation
• Algorithm
• Professions of the program
• Automated Market Makers (AMM)
• Flash commands
• Race Ahead

Collocation occurs when these HFT companies place their servers as close as possible to the servers of the exchange where they trade. Collocation is crucial because it speeds up transactions.

If only a very small distance is required for orders, this will speed up transactions.

As an example, let’s take an institutional trader who wants to buy 1,000 ge shares that are trading at $ 10.50. He does not want to pay more than $ 11 for GE shares. So it has a range of $0.50 to play with. However, it cannot directly enter the market and show its hands, as other investors, especially HFT traders, can see and manipulate the price of GE shares.

The high-frequency trading algorithm is also available and can detect what is happening in the market. You can see how these 100-share blocks enter the market and notice that some investors are buying in bulk.

These HFT algos then put their automatic market makers into action and start sending offers to the market.

The mode of operation of high-frequency trading strategies looks like this:

The algo HFT starts first and sends a 100-share order at $ 13, but nothing returns, since the other algorithm is programmed to buy no higher than $ 11. The HFT algorithm immediately cancels this order.

The algo HFT tests the markets again and sends another 100-share order at $12, but nothing returns and the order is immediately canceled.

All this happens in a split second.

The algo HFT will continue to test the market until it reaches the $ 11 mark. Then the offer is canceled and the automatic market maker algo immediately goes out and buys as many GE shares as possible and he comes back and sells them to the other institutional investor for $ 11.

The reason why it is forced to sell at 11 is is that there are no other stocks left on the market at this time, because the MA has pulled all the available stocks and therefore can manipulate the price and force the price up.

There are several types of high-frequency trading algorithms that are designed to take advantage of price movements in the market, and also to stimulate the market.

Another weapon that these HFT programs can use is flash commands.

Every time an order goes public, the exchange has to send that order directly to the broader market. Or he can simply flash the order to the members of the exchange.

When an order goes to the stock exchange and the stock exchange uses a flash order, that transaction or order flashes to all members of the investors within the stock exchange for a fraction of a second. You have the opportunity to complete this trade in a split second, or the order will then be sent to the rest of the market.