High Frequency Trading, a problem for Day Traders?

In recent years, the rise in computing power has led to a new breed of traders to become significant market players. These traders often have Physics and Computer Science degrees. This is because High-Frequency Trading is a highly quantitative activity often using very complex algorithms to determine when to open and close trading positions. Positions are often opened and closed within in seconds. In 2010, it is believed that high frequency counted for 70% of all trades placed on US equities markets. Some have insinuated that the rise of high frequency trading we reduce the possibilities for non sophisticated day traders. 

Whether High-Frequency Trading effects the ability for individual to day trade financial markets is somewhat a contentious issue, with people’s opinion radically differing. In this article I’m going to look at arguments from both sides of the debate. 

The case for High Frequency Trading threatening Day Traders 

  • Most of the algorithmic trading programs attempt to make profit on very short term movements in price.  Often high frequency trading operation will enter in and out of a trade within a few hundred milliseconds. There is no way that humans can compete with this, especially when trading with an OTC provider whose prices may be delayed somewhat. 
  • Monopolizing arbitrage opportunities the other class of High Frequency Trading operations aim to take advantage of arbitrage opportunities. For example an operation may attempt to profit from arbitrage opportunities when the value of ETF’s diverge from their Net Asset Value. Often these operations due to size and scale can take advantage from even the smallest divergence, leaving less opportunities.  
  • Resources. Quite simply many High Frequency Trading operations have more resources than the average day trader. The potential rewards attract top talent from top Universities and lots of potential investors, allowing these operations to acquire a technological advantage both in terms of computing power and internet speeds. This makes it harder for a small day trader to compete.   
The case against 
  • In fact even though its commonly reported that High Frequency trading and sophisticated algorithmic techniques are making hedge funds and other investment vehicles shed loads of cash, this is not really always the case. In fact figures from industry insiders seem to suggest that only 50% of these operations are profitable. With one of the problems being that many High Frequency Trading operations are engaged in a Zero Sum game competing against other operations for the same short term profits. 
  • Even though one common technique is to take advantage of arbitrage opportunities. My studies of certain ETF’s suggests to me that their remain significant arbitrage opportunities to be had and be taken advantage of, especially in less commonly traded instruments. 
  • Even if OTC traders or day traders can not take advantage of super short term price movements in the way HFT traders can this doesn’t prevent them from taking a longer outlook. Though those using derivatives may struggle to make profits from long term price movements due to the costs associated with keeping a CFD or Spread betting position open.  
  • HFT operations may have complicated algorithms and some of the finest minds behind them but they lack the intuition of those who have a feel of the financial markets. Though some would reject that such intuitions really give traders an advantage their do seem to people some people who have a certain kind of feel for financial markets which gives them a distinct advantage. 

All in all it appears that while the existence of High Frequency traders may make it more difficult for individual day traders to profit from the financial markets but it in no way prevents successful and skilled traders from making a profit from the financial markets. Whether future developments in High Frequency Trading and Algorithmic trading will further threaten the future of day traders remains to be seen.


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