The rapid-fire computer-based HFT developed gradually since 1983 after NASDAQ introduced a purely electronic form of trading. At the turn of the 21st century, HFT trades had an execution time of several seconds, whereas by 2010 this had decreased to milli- and even microseconds. On September 2, 2013, Italy became the world’s first country to introduce a tax specifically targeted at HFT, charging a levy of 0. 2005 and 2009 for which high-frequency trading might be accounted. As HFT strategies become more widely used, it can be more difficult to deploy them profitably.
According to an estimate from Frederi Viens of Purdue University, profits from HFT in the U. Though the percentage of volume attributed to HFT has fallen in the equity markets, it has remained prevalent in the futures markets. According to a study in 2010 by Aite Group, about a quarter of major global futures volume came from professional high-frequency traders. High-frequency trading is quantitative trading that is characterized by short portfolio holding periods All portfolio-allocation decisions are made by computerized quantitative models. The common types of high-frequency trading include several types of market-making, event arbitrage, statistical arbitrage, and latency arbitrage.
Most high-frequency trading strategies are not fraudulent, but instead exploit minute deviations from market equilibrium. A “market maker” is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price. There can be a significant overlap between a ‘market maker’ and ‘HFT firm’. By doing so, market makers provide counterpart to incoming market orders. Some high-frequency trading firms use market making as their primary strategy. NASDAQ and the New York Stock Exchange.
These strategies appear intimately related to the entry of new electronic venues. Academic study of Chi-X’s entry into the European equity market reveals that its launch coincided with a large HFT that made markets using both the incumbent market, NYSE-Euronext, and the new market, Chi-X. The Michael Lewis book Flash Boys: A Wall Street Revolt discusses high-frequency trading, including the tactics of spoofing, layering and quote stuffing, which are all now illegal. Much information happens to be unwittingly embedded in market data, such as quotes and volumes. By observing a flow of quotes, computers are capable of extracting information that has not yet crossed the news screens. Since all quote and volume information is public, such strategies are fully compliant with all the applicable laws.
Filter trading is one of the more primitive high-frequency trading strategies that involves monitoring large amounts of stocks for significant or unusual price changes or volume activity. This includes trading on announcements, news, or other event criteria. Software would then generate a buy or sell order depending on the nature of the event being looked for. Tick trading often aims to recognize the beginnings of large orders being placed in the market. For example, a large order from a pension fund to buy will take place over several hours or even days, and will cause a rise in price due to increased demand. An arbitrageur can try to spot this happening then buy up the security, then profit from selling back to the pension fund.
Certain recurring events generate predictable short-term responses in a selected set of securities. High-frequency traders take advantage of such predictability to generate short-term profits. Another set of high-frequency trading strategies are strategies that exploit predictable temporary deviations from stable statistical relationships among securities. Statistical arbitrage at high frequencies is actively used in all liquid securities, including equities, bonds, futures, foreign exchange, etc.