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High-Frequency Trading (HFT)

· 6 min read
Yellow DeFi


In the world of algorithmic trading, High-Frequency Trading (HFT) strategies are known for their fast order execution and information retrieval.

Companies utilizing HFT can analyze multiple markets while executing many trade orders for better profits and returns.

But how does HFT enable these high speed and turnover rates? What are the factors contributing to the maximization of the gains for different firms using HFT?

This article will discuss it all, starting with an overview of HFT, its emergence, how it works, and its benefits.

What is High-Frequency Trading (HFT)?

High-Frequency Trading is an automated trading system that utilizes powerful computational algorithms for processing many trade orders in a fraction of a second. HFT systems usually trade in small units, but they are super fast in executing them, which results in more significant returns over an investment horizon.

In addition to the high speed of trade orders, HFT is also known for detecting emerging trends and executing trade orders based on that recognized trend.

The logic for detecting trends and triggers is primarily deployed using different tools. It varies by the firms and financial institutions to facilitate other information for quickly executing the trades.

HFT is the main reason behind the subsequent skyrockets in the trade market as it automatically executes a large number of orders based on market conditions.

Typically, the HFT systems with faster execution speeds are more associated with market clashes than systems with slower execution speeds.

History of High-Frequency Trading

The emergence of HFT systems traces back to the 18th century with breakthroughs in modern communication technology.

In 1983 NASDAQ introduced computer-based trading, which developed gradually in the 1990s.

In 1998 U.S. Securities and Exchange Commission(SEC) approved the first computer to execute high-frequency trade orders. The machine was capable of executing trades faster than hundreds of humans.

Then by 2000, HFT accounted for 10% of global equity orders, and by 2009 HFT execution time reduced to several seconds with astonishing growth in trading volume.

By 2010 the execution time reduced to milliseconds, and more than 56% of global trades were executed using HFT systems.

How does High-Frequency Trading (HFT) work?

When it comes to the working mechanism of HFT, it is based on complex automated algorithms which use computing power and logic to get information and execute trades faster than anyone else in the market.

Latency plays a significant role when the system triggers a response to the market data and runs trading orders at a rapid rate.

The parameters for the trade orders are handled by the algorithm, which determines how to time, price, or manage the order after its execution.


HFT computational algorithms are made of various aspects that make them unique for determining trading opportunities. Here are some of the following:

Market Maker

Every algorithm keeps track of buy and sell quotes for different asset types, and once the trigger is spotted based on the market data, the system buys/sells shares and completes the order. The systematic process also helps the HFT systems to make more intelligent decisions for following orders.

Trade order Signals

Execution of trade orders by the algorithms is based on the final (buy/sell signals). Inaccurate transfer of signals can incur high losses due to fast execution speeds. So every signal should be communicated precisely to trigger trades properly.

Server Location

HFT algorithms can get faster access to market data servers if they are housed on the premises of trading firms. It helps companies reduce latency for executing trading orders.

Tick By Tick Data

HFT algorithms produce new trading orders every few nanoseconds based on market changes. The information is collected as Tick-by-tick data which can consist of interconnected variables (e.g., time, amount, the number of traded contracts ) to create more intelligent trading decisions for greater profits.

Asset Classes

HFT algorithms are trained with asset classes such as stocks, futures bonds, etc. to trade any type of asset at any point in time, thus, making them a preferred option for any market

Benefits of High-Frequency Trading Technology

  • Enhanced Liquidity HFT systems enhance liquidity in the market by increasing the number of buy and sell orders. HFT allows faster execution of trades than humans, which significantly increases the size of order books.

  • Reduced Costs HFT algorithms function without any humans. The infrastructure costs for optimizing these algorithms are way less than the cost of hiring well-experienced human traders.

  • Promotes Equality between markets HFT, with its use of algorithmic technology, allows small firms/banks to compete equally in trade markets with large institutions. The fundamentals of technology being the same allow both large and small-scale institutions to have equal footing.

  • Improved Information Discovery HFT systems can quickly scan information from multiple markets, which helps in improving the price discovery for a large number of orders traded on different exchanges.

The Future of High-Frequency Trading in Cryptocurrency Market

With HFT covering more than half of the U.S. equity orders on the stock exchange, the next giant big leap forward for HFT would be the crypto market. By taking advantage of HFT's fast information retrieval capabilities, crypto traders can track small price fluctuations on different types of crypto exchanges to guarantee high returns and success.

Cryptocurrency trading is inherently volatile, and trading in cryptocurrencies can incur considerable losses. Still, performance-focused exchange software lets you detect and navigate highly accurate trading signals while ensuring unparalleled security and transparency.

Want to Learn More About High-Frequency Trading?

In this article, we covered all the major concepts and aspects relating to High-Frequency Trading.

The following article will discuss other advanced aspects like HFT strategies, data, best practices, challenges, Ultra-High-Frequency Trading technology specifically designed for the crypto industry, and more.

If you'd like to learn more about High-Frequency Trading, State Channels, and non-custodial Blockchain-agnostic software technologies, we will be adding more stories to Yellow DeFi Blog as we unfold the technology.

If you are researching the best software stack for your crypto exchange platform, we suggest taking a look at Yellow Layer-3 hybrid exchange software technology, combining the best features and performance of decentralized (DEX) and centralized (CEX) platforms.