How HFT works: 3 simple explanations
High frequency trading (HFT) has long accounted for more than 80% of the total volume of transactions on world exchanges. However, it is rather difficult for an uninitiated person to deal with how such a trade is organized.
The users of the Quora question and answer resource decided to deal with this question and tried to formulate a simple description - using the sale and purchase of bananas as an example. We chose the best answers given during the discussion.
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Question : For example, I saw a banana, which costs one dollar. I'm ready to buy it, but then someone runs up to the checkout and makes a purchase before me. Then this someone turns to me and says that the ill-fated banana will sell me for a dollar and five cents. Is this high frequency trading?
HFT traders are intermediaries
According to Joseph Wang, the former vice-president of the Hong Kong investment company, in the context of the stock exchange it is better to think about the principle of selling on eBay, and not about the box offices of the Walmart hypermarket. That is, retail and high-frequency - not the same thing.
I explain: you want to buy a banana for one dollar. But, unfortunately, it is impossible to buy it by force of thought - you need an intermediary seller (trader). The intermediary will first find someone who will sell him 99-cent worth of bananas, and then sell them to you for one dollar. It would seem that you yourself could have done this operation, but you have more important things to do than search for a person who is ready to sell you a fruit cheaper. And the real benefit from such a deal will be only if you decide to buy 10,000 bananas (as a real trader will do), which is unlikely for a layman.
High-frequency trading is based on assumptions.
The user under the name Alan Chan writes that high-frequency trading is more a history of a complex mechanism, and not a single strategy.
Based on your analogy, there you are, the highest frequency banana seller and market. First, let's assume that there is high demand for a limited number of bananas, so prices are sensitive to supply and demand. Secondly, let's change the place of sale: let it be not a hypermarket, but an open market where different people can sell and buy bananas (and bananas can be supplied from anywhere). There are two such markets in the city.
How much will a banana cost under such conditions in our fictional world? Let's imagine that by buying a banana for $ 10, you can immediately sell it for $ 9. Otherwise, you can search for cheaper bananas and, thereby, increase the profit from the sale of one banana.
And here, for example, you and your wife / husband would like to have a dinner where you will receive guests with bananas, as is customary. You come to the first market and buy all the available bananas at a price of $ 10 apiece. The trader at this moment runs to another market, buys there 15 bananas for the same price to cover the bananas already sold to you, and takes the last 5 more with the thought that you will definitely buy them for any price. So it happens - you buy them from him for $ 10.50.
Thus, based on the above written: we can draw the following conclusions:
- The seller never knows if the buyer will buy the last 5 bananas, he just thought you looked like a person who was obsessed with bananas, and took a chance;
- You have the freedom to choose: you could refuse to pay $ 10.50 for a banana, demonstrating to the seller that in order to sell, the price must be reduced;
- Market prices for bananas fully reflect your actions to buy them. And if prices have not changed in the past, this does not mean that they will always remain fixed.
High-frequency traders provide liquidity
John Phileas views the high frequency trading market from two perspectives. From the perspective of an individual, a trader finds bananas for $ 0.99, and sells them to his buyer for one dollar. It offers the best price: it will either match the prices of other traders in the market, or it will be more profitable. From a social point of view, there is a certain third party - an intermediary who could also sell bananas for the same price. But due to the fact that he was ahead, he lost this very cent of earnings from each banana sold.
From the point of view of the market, you and a certain third party are the same person. As soon as you start to buy, then immediately get involved in the sale. Every time you buy stocks, you are then forced to sell them. That is, if traders do not raise the price for which you buy a share, then they deprive you (and any other person in your situation) the opportunity to receive the initial amount from its sale.
Another important note concerns the fact that traders provide liquidity and you do not have to wait for new deals. However, the market has now become fast enough without their help, especially in the area of ​​small sales. And yet, the increase in speed to microseconds does not matter so much for small investors as for large ones. Large investors, in turn, seek to avoid high-frequency sellers, considering that they do not actually provide them with any useful services.
Finally, high-frequency sales liquidity is liquidity “in good weather.” When the weather is favorable, they (sales) will improve your liquidity a little. But if dark times have come, they will try to sell you an umbrella on a sunny day or they will disappear altogether. Or try to sell you a banana for one dollar when you are not hungry at all.
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Source: https://habr.com/ru/post/331826/
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