From Me
I recently came across a newspaper article stating that high-frequency trading (HFT) is one of the causes of the recent volatility in stock prices, so I decided to look into HFT a bit. I couldn’t really understand it, and I concluded that it’s impossible for individuals to engage in it.
What is HFT (High-Frequency Trading)?
HFT is a trading method that automatically executes buy and sell orders at an ultra-high speed measured in milliseconds or microseconds. By using advanced algorithms and specialized high-performance computer systems, trades are conducted at speeds and frequencies impossible for humans.
Key Features:
Ultra-High-Speed and High-Frequency Trading: Transactions are executed at speeds that can reach thousands to tens of thousands of trades per second, a speed unattainable by humans.
Algorithmic Trading: Buying and selling decisions are made automatically based on pre-programmed algorithms.
Exploiting Short-Term Price Fluctuations: HFT aims to capture fleeting price differences or market inefficiencies to make instant profits.
Use of Advanced IT Technology: High-performance computers, high-speed communication lines, and specialized trading systems are essential.
Benefits:
Improved Market Liquidity: HFT places large orders, attracting more buyers and sellers to the market, thereby improving liquidity.
Reduction in Trading Costs: The advent of HFT has lowered trading fees, contributing to the reduction of overall trading costs for investors.
Enhanced Market Efficiency: HFT plays a role in quickly correcting market inefficiencies and promoting proper price formation.
Drawbacks:
Market Destabilization: The rapid buying and selling by HFT can increase market volatility and lead to sharp price swings.
Systemic Risk: A system failure in HFT could impact the entire market, raising concerns about increasing systemic risk.
Fairness Issues: There are concerns that HFT creates a market environment favoring a few investors with advanced IT technology, raising questions about fairness.
The Current State of HFT:
HFT has gained significant prominence in financial markets in recent years, but its substantial influence has also sparked discussions about the need for regulation. In some countries, regulations on HFT have been implemented, and in Japan, the Financial Services Agency is considering the introduction of a registration system for HFT firms.
Summary:
HFT contributes to improving market liquidity and reducing trading costs, but it also carries risks of market destabilization and fairness issues. HFT is expected to continue evolving with technological advancements and regulatory developments in the future.
Detailed Explanation of HFT (High-Frequency Trading)
In addition to the previous explanation, here is a more detailed look at HFT.
1. Examples of Strategies Used in HFT
HFT employs various algorithms to pursue profits in milliseconds and microseconds. Here are a few representative strategies:
Market Making: A method where the trader constantly quotes buy and sell prices and profits from the spread between them. HFT firms analyze the market at high speed and trade when the spread widens.
Arbitrage: A method that takes advantage of temporary price differences between different markets or financial instruments. For example, if the same stock is traded at different prices on the Tokyo Stock Exchange and the Osaka Stock Exchange, the trader buys at the cheaper price and sells at the higher price to lock in a profit.
Order Flow Prediction: A method that predicts the order trends of large investors and trades ahead of them. By analyzing order information and past trading data, future price movements are predicted.
2. Technology Required to Achieve HFT
HFT is supported by advanced IT technology.
Ultra-High-Speed Trading Systems: To process orders at millisecond or microsecond speeds, high-performance computers, low-latency networks, and specialized trading software are indispensable.
Co-location: By placing their servers as close as possible to the exchange’s servers, companies minimize communication distance and reduce order latency.
FPGA (Field-Programmable Gate Array): An integrated circuit that can be reconfigured. Since it processes faster than software, some parts of the algorithm are implemented on FPGA to achieve further speed.
3. Discussions Surrounding HFT
HFT contributes to improving market liquidity and reducing trading costs, but the following issues are also pointed out:
Market Destabilization: The high-speed, large-volume orders by HFT can increase market volatility, potentially causing sudden price movements known as “flash crashes.”
Systemic Risk: If a failure occurs in the HFT system, it could affect the entire market, raising concerns about increased systemic risk.
Fairness Issues: There are concerns that the market environment created by HFT favors a few investors with advanced IT technology, raising questions about fairness.
4. The Future of HFT
HFT is expected to continue evolving with technological advancements and regulatory developments.
Use of Artificial Intelligence (AI): By leveraging AI, more advanced market analysis and predictions become possible, leading to further evolution of HFT strategies.
Strengthening Regulations: To ensure market stability and fairness, regulations on HFT are being strengthened globally.
Expansion into New Markets: HFT may expand beyond the stock market into other financial markets such as the bond and foreign exchange markets.
HFT is a complex topic, and various discussions surround its impact and merits. It is essential to continue gathering information and deepening understanding.
HFT Trading is Impossible for Individuals
HFT requires advanced technology and significant capital, making it nearly impossible for ordinary Japanese individual investors to engage in full-scale HFT trading.
As mentioned earlier, HFT involves numerous barriers that are insurmountable at the individual level, including advanced expertise and technology, substantial capital, and compliance with regulations.
Even so, if individual investors wish to attempt something similar to HFT, they might consider the following options, though none are easy:
1. Attempt Algorithmic Trading
Some online brokers offer individual investors certain automated trading features.
If you have programming knowledge, you can use APIs to build your own trading system.
However, these functions are not intended for ultra-high-speed, large-volume order processing like HFT, and profitability is a separate issue.
2. Invest in Overseas HFT Firms
Investing in the shares of overseas HFT firms is another option, but many HFT firms are privately held, making stock investment difficult.
Some hedge funds employ HFT strategies, and it is possible to invest in those funds. However, significant capital is often required.
3. Work for an HFT-Related Company
If you are interested in working in HFT, you could aim to work for a securities company, an HFT firm, or an IT company where you can apply specialized knowledge in system development or data analysis.
Important Notes
HFT is a world for professionals with advanced knowledge, skills, and capital.
If you venture into it without careful consideration, you risk incurring significant losses.
Individual investors are advised to consider more prudent asset management methods, such as long-term or diversified investments, rather than HFT.
My Opinion
Given the above, if you’re ever approached with an HFT investment opportunity, be suspicious of fraud. Furthermore, if someone suggests using LINE, it’s likely that you’re being added to an economic weakling list, which can be bought and sold, making you an easy target. I think it’s better to avoid such situations.
(Note)
This text is based on information obtained from AI. AI responses are not always correct, so it is important to verify critical information.
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