High Frequency Trading Guide (PDF)

High frequency forex trading was created and set in after 2005 by the Securities and Exchange Commission “SEC”, in order to modernize security markets and improve their security. In fact, HFT represents an automatic trading system that uses mathematical models and algorithms to make an enormous number of orders at extremely high speed. Hence, this technique takes human decisions and interactions out of the equation by eliminating any emotional decisions that can impact the trading process. On the other way, high-frequency trading has enhanced market liquidity and competition. Also, reduced the end-of-day price dislocation. 

High frequency trading FAQ

What is a high-frequency trading Strategy?

High-frequency forex trading Strategy is a systematic and methodical trading process characterized by high speeds. In effect, he represents an automated trading platform that uses powerful computers and servers. Also, he employs the fastest connectivity technology that can help to trade a huge number of orders in fractions of a second. HFT is mostly used by investment banks, hedge funds, and institutional investors. Actually, before the introduction of the high-frequency trading technique, traders were suffering from small bid-ask spreads. However, we denote the HFT by an important turnover rate and an important order to trade ratio that demands high-frequency financial data and electronic trading tools. Thus, it removes the problem of the tiny bid-ask spreads.

High-frequency forex trading permits firms to profit from increasing the competition and the liquidity in the market. Yet, the liquidity provided by HFT firms is available to the FX market one second and then it vanishes, which represents a big problem for some traders. 

Some of the most popular high-frequency trading firms in the world are :

  • Allston Trading
  • DRW Trading
  • XR Trading
  • Virtu Financial
  • Optiver

How do HFT algorithms work?

High-frequency trading uses a complex algorithm and sophisticated technological tools to analyze multiple markets and execute numerous orders based on market conditions. Basically, the algorithm composes of a set of rules and instructions in order to make computers perform and complete specific tasks. However, the HFT algorithm depends on two simple orders “sell-high” and “buy-low” to earn from the bid-ask spread. The idea is about the application of three main steps in milliseconds:

  • Examine small-size orders and scan them to forecast emerging tendencies.
  • Detect and identify pending orders with important sizes.
  • Analyze the patterns and the time taken in trade execution.

Hence, this robotic system that can respond faster than any human possibly could, will conduct profitable trades in fractions of a second.

In fact, we know that the important determinant of bid-ask spread size is the volume of trading. Then, a bid-ask spread may be tight for known assets (the assets that are traded frequently and massively). Conversely, the unpopular assets will have a big bid-ask spread on a certain day. At this point, HFT solves this problem by increasing the trading volume in markets by reducing the spread.

Is forex HFT profitable?

High-frequency forex trading provides important benefits and for sure it defines a profitable technique for any user. In a way, it tights bid-ask spreads. On the other way, it helps in raising the market liquidity on normal days. Also, it assists in improving price discovery (identifies the proper price for any instrument in the market). However, the main reason for using the HFT tool is to assure the best execution of trades. Because he ignores the human element and we can use it to trade numerous markets and securities much better than a human trader. Hence, relying on such algo-trading technique can provide multiple advantages like:

  • Making important wins on every small price change: we will take profit from little price fluctuation.
  • Getting more trading opportunities: through scanning multiple markets and different stock exchanges, the HFT creates more opportunities like arbitrating the same instrument with petty price differences on two separate markets.
  • Increasing the market liquidity: HFT improves the competition in the forex market owning to larger volume (a large number of trades) and speed execution, so he makes the market more price efficient.

Actually, the speed of execution can impact profitability. That is why the more the execution is fast more the operation is profitable.

Being a profitable technique doesn’t imply that you can’t have damaging effects. So, we can’t deny that the algorithmic HFT can be risky, because it intensifies the systemic risk. This happened in 2010 with the “Dow Jones Industrial Average” generating a “big price crash” called the Flash crash.

High Frequency Trading

Is high-frequency trading ethical?

A global association like the CFA Institute considers that high-frequency trading is not unethical or immoral. Therefore, the firms have the right to engage in HFT while they respect the appropriate rules and regulations. In contrast, they consider that high-frequency trading enhances financial market fairness. Firstly, because it reduces the end-of-day price dislocation. Secondly, while HFT increases the liquidity in the market, investors will feel more comfortable about selling their investment at any time without any difficulties. However, this electronic style of trading receive significant criticism for:

  • Taking advantage of ”latency” issues. For instance, some HFTs abuse the delays between the time that computers execute trades and report them to the market to trade information ahead of others. 
  • Since we can use it for ultra-short time strategies. The HFT gives an unjust advantage for big firms against smaller institutions and investors. Or stock markets are supposed to offer an equal and fair field to all market actors.

So, referring to the previous reasons many market actors consider the HFT as an immoral and unethical tool.


Nowadays, algorithmic trading and especially high-frequency trading play an essential role in the financial markets due to several factors like:

  • The growing part of technology in security markets.
  • The enormous number of information.
  • The complexity of the instruments and products of the financial markets.

The purpose of using high-frequency trading is to make small profits on each trade, usually by focusing on the bid-ask spread. Yet, until today, this technique bounces between supporters and opposers. Some market actors criticize it because it lets traders concentrate on opportunities that disappear fast. Also, consider that the HFT distorts the markets by creating a huge number of trades in milliseconds. Others see that this trading technique analyzes multiple markets and determines efficient investing possibilities that can help traders make much more profits.