The largest investment firms, hedge fund managers, and other powerful organizations conduct high-frequency trading to inject liquidity into the market. The process utilizes algorithmic trading, or automated trading systems, to conduct millions of transactions within just a few seconds, according to Investopedia.
Can Anyone Participate in High-Frequency Trading?
Single investors cannot execute high-frequency trades because they lack the electronic infrastructure and the financial means to support that level of trading. The computers that process high-frequency trades can identify changes in the market and capitalize on them immediately. In fact, it takes only milliseconds for the algorithms to act on a dip in bid price.
What is the Advantage of High-Frequency Trading?
When stock exchanges lack liquidity, the entire structure suffers. High-frequency trading allows the largest institutions to inject millions of dollars' worth of liquidity into the market. Each time stocks are released or purchased, more money enters the stock exchange.
When trading securities at such high speeds, the investor generates only a minuscule profit from each individual transaction because the stock is held for such a brief time. However, when each trade is multiplied by thousands or millions, the profits add up.
Is High-Frequency Trading Unscrupulous?
There is nothing nefarious or fraudulent about high-frequency trading, according to Forbes. In fact, it benefits the stock exchange and helps individual investors capitalize on new deals during different times of day.
Even though individual investors can't participate in high-frequency trading, they can benefit from understanding the process. If you want more control over your cash, sign up for Mint to gain access to powerful financial tools that help you save and invest wisely.