1. What is high-frequency trading?

High-frequency trading is a technique that involves specialized software and algorithms, high-end computers, low-latency internet access and up-to-the-moment market data in order to outpace all of the competition and allow for unique strategies not otherwise possible.

High-frequency trading, or HFT, is a system in which algorithms and software make multiple trades per second and which offers a slew of benefits not available to regular traders. It has existed long before cryptocurrency and is believed to make up as much as 80% of the volume in certain asset markets. Now, however, it is becoming a major factor in the world of decentralized assets as more and more institutional investors begin to take notice.

The principle behind most HFT strategies requires that those executing them are among the first to do so — and sometimes, all it takes is a fraction of a second to turn a profitable move into an unprofitable one. This has evolved into some specific techniques that this type of traders use to stay slightly ahead of the competition. This can certainly involve the latest and most powerful equipment, but it also requires the development of very clever ways of working inside the slight variables present throughout the market and exploiting them in millisecond turnarounds.

Techniques and strategies can include colocation, market-making, arbitrage, pinging and news-based trading. Each option comes with costs and benefits, and not all strategies are always available to traders, depending on market conditions. Of course, there is still some debate as to whether it is ethical to create an uneven playing field. To be sure, some of these strategies are illegal or highly regulated inside traditional markets. It is true that cryptocurrency is still in a bit of a “Wild West” phase, but this is changing quickly and traders should be aware of their local laws before engaging in this type of activity.