The High frequency trading is a Computer-based, fully automated, lightning-fast trading with a high number of trades. High frequency trading is subject to strict rules and regulations in Germany and most other countries. We have summarized for you whether and how this form of trading is suitable for private traders, what conditions must be met and what significance high frequency trading has.
The most important in a nutshell
- High-frequency trading occurs when a large number of fully automated trades are executed without human decisions and latency-reducing infrastructure is used for this purpose
- This form of trading is hardly accessible to private investors and is used almost exclusively in the professional sector
- High frequency trading is considered controversial and can have a significant impact on markets and exchanges. It is therefore strictly regulated and requires a corresponding license
- Private traders can use alternatives based on the same concept
High-frequency trading on the stock exchange: what's behind it?
Powerful computers have been forming the The backbone of the financial markets. As well as being used in banks, public authorities and for market infrastructure, the systems are also being used more and more by retailers.
AI-supported investment recommendations, trading bots and automation in trading programs are already part of everyday life. They optimize our trading decisions, but most traders still open and close their positions themselves, with the support of the systems.
The situation is quite different with High frequency trading off: Here the Trades fully automated, without any human intervention from. As the name suggests, this also includes the Number of trades enormously high.
The used High-performance computer can in the range of microsecondsa millionth of a second. In order to be able to utilize this time advantage at all, a Appropriate infrastructure requiredHigh frequency trading often takes place in the immediate vicinity of the exchanges in order to speed up data transmission.
Using pre-programmed algorithms, the systems act at lightning speed in an attempt to realize profits. This is achieved, for example, by recognizing market delays and acting "faster than the competition". Differences between trading venues can also be exploited in this way.
High-frequency trading already accounts for a large proportion of the trading volume on the stock exchange. Its supporters argue that it contributes to liquidity and low spreads and is very important for the functioning of the stock exchanges and the economy as a whole. However, there are also very critical voices.
Definition: high-frequency trading is strictly regulated
The High Frequncy Trading is regulated in Europe and defined in several laws. But trading at high speeds and using computers is not automatically high-frequency trading! So you don't have to worry that your Scalping strategy an official permit is required.
In Germany, the most important High Frequency Trading Act decisive. A very similar definition can also be found in the Markets in Financial Instruments Directive (MiFID), an EU directive on various financial instruments. It define high frequency trading as follows:
High-frequency trading occurs when
- A system the trade (initiation, forwarding, execution, etc.) independently and without human intervention.
- So-called "latency-reducing infrastructures" are used.
- A High volume of intraday notifications is available.
If all three points apply to a trading strategy and the executing person is acting on his own account, a Permission in accordance with the German Banking Act required.
The first definition point, which Trade without human interventionis in times of trading bots and algorithms comparatively common. Today, any trader can use such programs. But only if the next two requirements are also met is there actual high-frequency trading.
Among the "latency-reducing infrastructures" is understood to mean technical measures designed to speed up trade. Since a normal Internet connection, for example, has a slight delay in data transmission, it is not suitable for trading in the microsecond range.
The most popular measure to avoid this loss of time is the local proximity to the trading centers. If a high-performance computer is located in the immediate vicinity of the exchange's servers, signal transmission is much faster.
However, if the data first has to "travel" halfway around the world, the time advantage of high-frequency trading systems is lost. Finally, a High volume of trades ("high intraday message volume") is required to meet the definition of high-frequency trading.
The authorities deliberately do not give any specific figures here, but in practice Several thousand trades per day required to fulfill this definition point. Overall, the risk of being wrongly classified as a high frequency trader is therefore very low.
If high-frequency trading is required by law, the numerous requirements of the authorities. For example, companies must take various safety precautions and constantly monitor them in order to avoid unintentional market manipulation.
The many regulations are another reason why this type of trade is not realistically feasible for private individuals Even if you had the necessary computer systems and the technical know-how for high frequency trading, the legal requirements would go beyond the scope.
High-frequency trading, curse or blessing?
The concept High-frequency trading has long been criticized. Opponents and proponents put forward different arguments. The fact is that a unregulated high-frequency trading poses considerable risks go out. This type of trade is therefore heavily regulated and monitored on all markets.
The individual stock exchanges and supervisory authorities use different measures to minimize these risks. With Volatility interruptions for example, limits the ability of algorithms to cause damage.
In addition analyze the control bodies with great effort Market movements. This is because high-frequency trading Manipulation possible - particularly in connection with large amounts of capital. The authorities have already been able to identify and stop a number of such fraud attempts in the past.
To this end, high-frequency trading operators must disclose their algorithms on request. Automated plausibility checks allow the exchanges to uncover further inconsistencies. Despite this Extensive safety measures stay Uncertainties and problems exist.
Advantages
High-frequency trading accounts for a large proportion of daily trades on the stock exchange. As a result, huge volumes of Stocks, Futures, Foreign exchange and Co. In the episode liquidity inevitably increases, which in turn is positive for banks, companies and small investors.
As high-frequency traders are constantly closing trades, it is easier for other traders to find a counterparty for their own positions. Proponents of the method assume that In this way the spread (difference between purchase and sales price) on the markets.
However, the main advantage and ultimately the reason why banks and companies engage in this type of trading is the Profit prospect. The trade generates income "out of nothing", which is of course extremely positive for the institutions involved.
Problems
High-frequency trading should be viewed critically, as it can lead to numerous direct and indirect problems. The seemingly magical money-making (especially through arbitrage strategies) that the trading technique offers has considerable ethical complications.
The participants generate additional assets without having contributed any market value. Other market participants, such as workers and employees, ultimately experience a devaluation of their labor: if money can be created out of nothing, their own work becomes less important.
Critics also note that trading in high frequencies gives stock exchanges a Fake increased demand becomes. Since the high frequency traders have no real interest in the traded stocks (e.g. they do not buy shares because they believe in the potential of the company), falsify and distort the market data.
Dozens of studies that have investigated this problem in the past have come to the same conclusion: the High-frequency trading on the stock exchange increases costs for other market participants.
Due to the resulting Distortions and the unpredictability the confidence of the population also decreases in the financial markets as a whole. High-frequency trading is also susceptible to errors and manipulation attempts.
Due to the high speed at which the systems execute their algorithms, the damage also adds up to huge sums in a short time. The consequences can affect not only the companies that engage in this type of trade, but also negative influences on the markets themselves take.
Malicious or unintentional manipulation has repeatedly caused considerable damage. In view of the dangers and problems associated with high-frequency trading, the Desire for stricter regulations or even a complete ban not surprising.
Although numerous critics are calling for such measures, changes to the regulations for high frequency trading in Germany are rather unlikely.
High frequency trading strategies
Different strategies can be used when trading in high frequency. They all utilize the advantages of computer systems and are based on one of two basic concepts:
- The high speed of the trading systems or
- The ability to sell high trading volumes in a short period of time
Although high-frequency transactions are not accessible to private individuals due to the considerable technical and regulatory effort involved, they however, offer interesting strategic approaches and can help retailers to optimize their own approach.
It is also it makes sense to know the high-frequency concept. This is the only way you can understand how the markets work and trade successfully in the long term!
1. volume strategies
Thanks to powerful computers, operators can Thousands of orders in the shortest possible time place. The systems can also easily monitor dozens of trading venues and an unlimited number of assets in order to react immediately to changes.
This makes it possible, for example, to buy all available shares in a company in different parts of the world as soon as they become available. Other Volume strategies rely on price changeswhich is triggered by the release of a high volume of trades are caused.
2. speed strategies
The majority of high-frequency retailers use the superior speed of the programs in order to realize advantages on the market. Due to the possibility, Trade price differences within microsecondsthey can ideally exploit differences or short-term offers.
A popular way of using this speed is the Arbitrage trading. Here you use Minimal price differences between different exchanges. As such differences usually even out extremely quickly, a fast pace is required.
The computers move large volumes between trading venues at lightning speed. For example, the system could buy shares at trading venue A for 100 euros and immediately sell them at trading venue B for 100.01 euros.
One cent of profit may not seem worth mentioning at first, but it adds up with a high volume per trade. In addition, thousands of such transactions can be processed in a short period of time, which also drastically increases income.
Arbitrage strategies are also widespread among private traders. Without the infrastructure of high-frequency trading, however, such procedures are clearly not possible. less successful.
You also need access to appropriate Data to discover price differences quickly and reliably - another reason why arbitrage trading is more suitable for professionals.
Through signaling services, such as Forex signalsHowever, access to trading data for private individuals has improved in recent years. Arbitrage and similar forms of trading have experienced a small renaissance as a result.
The exploitation of favorable but time-limited opportunities also falls within the scope of speed-based strategies. The systems of high-frequency traders monitor a wide variety of assets and wait for attractive opportunities.
A major, sudden sell-off or a sudden spike in prices are typical examples. Such opportunities can only be exploited with the high speed of computers.
Implementation for private traders
It is not completely impossible, but the High-frequency transactions are extremely difficult for private traders to implement. Due to the high technical and legal requirements, its use is almost exclusively for banks and other institutions.
However, as a private market participant you can apply the same techniques (in a slightly modified form) and thus benefit from the underlying concept. There are several options available to you
1. trading bots and automated trading
The Automating trading decisions and transactions has a long history in the financial markets. Even a simple Limit- or Stop order is ultimately an automation: You specify that a transaction should be executed automatically when a set value is reached.
But this concept can be taken much further! With high-quality trading programs, you can translate complex strategies into ruleswhich the software then executes for you. You benefit from the computer's emotionless execution - it knows no panic, greed or uncertainty.
Today's traders can choose from an increasing number of automatic trading offers. It is therefore all the more important that you have a Use trading software with suitable interfaces. This is the only way you can use the external tools in practice.
CapTrader can do that:
CapTrader customers receive free access to several professional trading programs. Alternatively, you can connect a trading tool via external interfaces. Our experienced German customer service will help you with questions and problems.
Particularly popular at the moment is the "AI trading". Artificial intelligence is on everyone's lips anyway and does not stop at the financial market. The adaptive computer system your Optimize your strategy or implement it for you with high precision.
The offers often include Fully automated AI investmentswhich are usually created in just a few seconds via attractive apps. However, they are aimed more at inexperienced people and have not yet been able to show any lucrative long-term returns.
As Additional input for your own trading strategy however, the programs are definitely useful. Regardless of whether you use an AI, create rules directly in a trading program or use external software ... it is It is strongly recommended to test the application on a demo account first!
A lot can go wrong with automation. Long test loops and stress tests of the programs are also essential in the high-frequency range. You can connect your bots, automation and external trading software via a Demo account at CapTrader.
2. trading strategies with high speed
The second important advantage of trading in high frequency is the High speedwith which the programs execute the instructions. This aspect can be with regular computers and typical home Internet connections - the implementation of a trading instruction simply takes too long.
However, fast trading is also popular among private traders. Here in particular the Scalping a trading philosophy, in which the Numerous quick trades with small profits add up. As high-frequency trading is rather inaccessible to non-professionals, scalping is generally regarded as the fastest form of trading.
Scalping is generally regarded as the fastest form of trading. Although high-frequency trading is significantly faster, it is almost inaccessible to private traders.
The Scalping is therefore similar to the way high-frequency trading works. High frequency trading is therefore often jokingly referred to as a "scalping strategy on speed".
While the technical possibilities play a decisive role in high-frequency trading (low latency/fast data transmission, powerful computers, etc.) In scalping, the trader's expertise and discipline are the most important success factors.
You should also bear in mind that with fast trading strategies the broker plays an enormously important role! If you only buy individual shares occasionally, the costs of trading are negligible.
With scalping, high-frequency trading and similar procedures, however, you place several dozen to thousands of trades per day! Already The smallest differences in your broker's billing model can result in massive differences.
This is how CapTrader when trading US shares, for example more than ten times cheaper than comparable offers from a German house bank. For transactions on German stock exchanges, CapTrader undercuts the banks by half.
CapTrader can do that:
With trading prices from $ 0.01 per US share or 0.1 percent of the order value for German securities, CapTrader offers you the most favorable conditions. Options (from 2.00 euros), futures (from 1.00 euros) or forex trading (from 3.75 euros) also keep your returns low thanks to the low costs.
Conclusion: High-frequency trading remains the preserve of professionals
The High frequency trading seems extremely inviting, as it promises continuous returns without any action on your part. Unfortunately, this form of trading remains still reserved for professionals.
Private traders can hardly provide the necessary infrastructure of powerful computers and high-speed data transmission. In addition, this trading is highly frequent strictly regulated!
If you meet the definition of high frequency trading (trading without human decisions, latency-reducing technology, high trading volume), you need a Permission under the High Frequency Trading Act.
A hurdle that is entirely justified in view of the dangers: the High frequency trading can - intentionally or unintentionally - be Market distortions arisethat cause considerable damage. Genuine manipulation has also occurred in the past.
Private traders can nevertheless apply the philosophy of high-frequency trading to their own approach: Strategies such as the Scalping or the use of Trading bots and automation use the same approach as high frequency trading.
No official permission is required here either! Nevertheless, you are well advised to first test such strategies on a Demo account to test. Because the risks are considerable.
