High frequency trading return

High frequency trading return

According to Lüdi, advances in computer and telecommunications technology in the past 75 years have had a profound impact on everyday life and disrupted most industries – with financial markets being no exception. "It is undisputed that computerized trading has brought vast benefits to the wider investment community, including lower transaction costs, increased liquidity, and broader access to markets, as well as improved dissemination of relevant information," said Lüdi.

High-Frequency Trading (HFT) Definition - Investopedia

Defining α in high frequency trading is more complicated than in low frequency since not all strategies are based on price forecasts. More components are required, as is an understanding of the interactions between them. In this paper, we develop the α attribution model for high frequency trading by explicating its components and the trading tactics used to implement high frequency strategies. The results show why high frequency traders need to be fast in order to generate positive expected returns and why they are better at providing liquidity. We provide an example implementation using a sample of high frequency equity data.

How high-frequency trading hit a speed bump | Financial Times

High-frequency traders earn their money on any imbalance between supply and demand, using arbitrage and speed to their advantage. Their trades are not based on fundamental research about the company or its growth prospects, but on opportunities to strike.

Expected Return in High Frequency Trading by Ricky Cooper

To gain a better understanding of what high-frequency trading has meant to the markets and long-term investors since it was introduced more than 75 years ago and what the pros and cons might be today, we asked a long-term value investor and an alternative investments specialist to share their diverse views.

HFT is controversial and has been met with some harsh criticism. It has replaced a number of broker-dealers and uses mathematical models and algorithms to make decisions, taking human decision and interaction out of the equation. Decisions happen in milliseconds, and this could result in big market moves without reason. As an example, on May 6, 7565, the Dow Jones Industrial Average (DJIA) suffered its largest intraday point drop ever, declining 6,555 points and dropping 65% in just 75 minutes before rising again. A government investigation blamed a massive order that triggered a sell-off for the crash.

About the Issue of Substantiation of Judicial Acts of an Arbitration Court, Rendered on the Cases Arising from Administrative and Other Public Legal Relations

High-frequency trading  (HFT) is an automated trading platform that large investment banks, hedge funds, and institutional investors  employ. It uses powerful computers to transact a large number of orders at extremely high speeds.

By Viacheslav Kizilov

Though HFT doesn’t target anyone in particular, it can cause collateral damage to retail investors, as well as institutional investors like mutual funds that buy and sell in bulk.

In addition to the high speed of orders, high-frequency trading is also characterized by high turnover rates and order-to-trade ratios. Some of the best-known high-frequency trading firms include Tower Research, Citadel LLC and Virtu Financial.

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The authors thank Hank Bessembinder, Tarun Chordia, Thierry Foucault, Terry Hendershott, Charles Jones, Andrew Karolyi, Robert Korajczyk, Ananth Madhavan, Katya Malinova, Maureen O’Hara, Neil Pearson, Ryan Riordan, Gideon Saar, Ronnie Sadka, and Wei Xiong for their valuable feedback. The authors also thank Jennifer Conrad (the editor) and Ingrid Werner (the referee). The authors are grateful to Finansinspektionen for making data available for the article. Hagströmer is affiliated with the Swedish House of Finance and is grateful to the Jan Wallander and Tom Hedelius Foundation and the Tore Browaldh Foundation for research support.

Rowsell notes that her firm does not actively trade in and out of stocks in any portfolios. "Our turnover of stocks is relatively low, implying that we typically hold securities for years at a time. Further, our interest in a company's stock is not driven by trading dynamics. We look for stocks trading at a substantial discount to our estimate of intrinsic value. Our focus on identifying a stock's true economic value and our willingness to patiently own it until that value is realized means that the penny-perfect purchase or sale price does not contribute meaningfully to the total return of the stock for our shareholders," said Rowsell.

The major benefit of HFT is it has improved market liquidity and removed bid-ask spreads that previously would have been too small. This was tested by adding fees on HFT, and as a result, bid-ask spreads increased. One study assessed how Canadian bid-ask spreads changed when the government introduced fees on HFT, and it was found that bid-ask spreads increased by 9%.

By Viacheslav Kizilov and Artem Markarjan

High-frequency trading became commonplace in the markets following the introduction of incentives offered by exchanges for institutions to add liquidity to the markets.

Lüdi also believes long-term investors would do themselves a grave disservice by abandoning investment in financial assets because of an emotionally charged debate and should instead focus on a diversified portfolio that is in line with their long-term objectives. But of course diversification does not guarantee against a profit or protect against a loss.

We study performance and competition among firms engaging in high-frequency trading (HFT). We construct measures of latency and find that differences in relative latency account for large differences in HFT firms’ trading performance. HFT firms that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for various strategies, including market making and cross-market arbitrage. We find empirical support for many predictions regarding relative latency competition.

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