Strategies and secrets of high-frequency trading (HFT) companies

Confidentiality, strategy, and speed are the terms that best define high-frequency trading (HFT) companies and even today’s financial industry.

High-frequency trading companies keep secrets about their operations and the key to their success. Important people associated with HFT avoided the spotlight, preferring not to be known, although this is now changing.

What is a high frequency trading (HFT) company?

Companies in the high-frequency trading business use a variety of strategies to trade and make money. These strategies include different forms of arbitrage-index arbitrage, volatility arbitrage, statistical arbitrage, merger arbitrage, global macro, long/short stocks, passive market making, etc.

HFT companies rely on the super fast speed of computer software, data access to important resources (NASDAQ TotalView-ITCH, NYSE OpenBook, etc.), and connections with minimal latency (latency).

Let us further explore the types of high-frequency trading companies, their money-making strategies, major players, etc.

How high frequency trading (HFT) companies work

High-frequency trading companies usually use private funds, private technology and some private strategies to generate profits. High-frequency trading companies can be roughly divided into three categories.

  • The most common and largest form of high-frequency trading companies are independent proprietary companies. Proprietary trading (or “proprietary trading”) is conducted with the company’s own funds rather than the client’s funds. Similarly, profits are given to the company, not to external customers.
  • Some HTF companies are subsidiaries of broker-dealer companies. Many formal broker-dealer companies have a sub-section called the proprietary trading desk, where high-frequency trading is completed. This part is separate from the business the company does for its regular external customers.
  • Finally, high-frequency trading companies also operate as hedge funds. Their main focus is to use arbitrage to profit from the inefficiencies in the pricing of securities and other asset classes.
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Before the Volcker rule, many investment banks had departments dedicated to high-frequency trading. After Volcker, no commercial bank can have proprietary trading desks or any such hedge fund investments. Although all major banks have closed their HFT stores, some of them still face allegations of past malfeasance that may be related to HFT.

How do they make money?

Legitimate traders use many strategies to make money for their company; some are common, some are more controversial.

Buyer and seller transactions

These companies trade from both parties (that is, in the case of selling, they use limit orders higher than the current market to place buy and sell orders, and in the case of buying, they use slightly lower than the current market Price limit order). The difference between the two is the profit in their pockets.

Therefore, these companies are obsessed with “market making” just to profit from the difference between the bid and offer spreads. These transactions are carried out by high-speed computers using algorithms.

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Provide liquidity

Another source of income for high-frequency trading companies is that they get paid for providing liquidity through electronic communication networks (ECN) and some exchanges. High-frequency trading companies play the role of market makers by creating bid-ask spreads, stirring up low-priced, high-volume stocks several times a day (a typical favorite of high-frequency trading). These companies hedge risk by amortizing transactions and creating new transactions.

Statistical arbitrage

Another way for these companies to make money is to look for price differences between securities on different exchanges or asset classes. This strategy is called statistical arbitrage, in which proprietary traders are looking for temporary inconsistencies in prices on different exchanges. With the help of ultra-fast transactions, they take advantage of these small fluctuations that many people have not even noticed.

Create rapid price changes

High-frequency trading companies also make money by indulging in momentum ignition. The company may aim to use a series of transactions to cause stock prices to spike, with the motivation to attract other algorithmic traders to also trade the stock. The initiators of the whole process know that after a bit of “artificially created” rapid price fluctuations, the price has returned to normal. Traders make a profit by opening a position early, and finally sell before closing the position.

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Participants in the HFT world range from small companies to medium-sized companies and large companies. Some names in the industry (in no particular order) include:


Companies engaged in high-frequency trading often face risks related to software anomalies, dynamic market conditions, and regulations and compliance. One obvious example is the fiasco on August 1, 2012, which put Knight Capital Group on the verge of bankruptcy. Less than an hour after the market opened that day, it lost $400 million. “Trading failures” caused by algorithm failures resulted in unstable trading and poor orders for 150 different stocks. The company was eventually released on bail.

These companies must be committed to risk management because they need to ensure substantial regulatory compliance and respond to operational and technical challenges.

Bottom line

Companies operating in the HFT industry have earned themselves a bad reputation for their secret ways of acting. However, these companies are slowly getting rid of this image and making public appearances. High-frequency trading has spread across all major markets and is an important part of them.As of 2020, these companies are estimated to account for about 50% of U.S. stock trading volume High-frequency trading companies face many challenges because their strategy is questioned time and time again, and there are many suggestions that may affect their business forward.


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