Money managers aren’t the only ones fretting over the onslaught of high-frequency trading.
Day traders, also known as discretionary traders, are finding it difficult to make money in a marketplace dominated hyperactive machines. "Discretionary traders are losing," Mike Bellafiore, a partner with proprietary shop SMB Capital, said at the recent High Frequency Trading World conference. "There are certain patterns that have been taken out of the marketplace because of high-frequency traders."
Day traders, typically associated with a manual trading style and a subjective decision-making process, are finding the strategies they’ve lived on are disappearing. Opportunities for momentum trading, where traders piggyback on a stock’s trajectory, or scalping, where traders exploit bid-ask spreads, have virtually disappeared. As for scalping, "That is what the HFTs are doing now," Bellafiore said. "Those plays have been taken out of our playbook."
Like day traders, high-frequency traders try to detect patterns in quotes and trade data and take positions accordingly. Unlike, day traders, however, they rely on algorithms and a high-speed trading infrastructure to do more trades, more quickly. Point-and-click day traders can’t compete.
"When I started trading we used to be swing traders," Bellafiore said. "We would trade Cisco and Microsoft on an intraday basis. Those stocks don’t move anymore." Swing trades typically occur at the end or near the end of big price moves.
Some discretionary trading firms are attempting to morph into high-frequency shops by building black box trading systems. That’s not so easy though, according to one executive at a top discretionary trading firm. "Developing a profitable black box is so much harder than developing a profitable discretionary trader," Andrew Actman, chief strategy officer at Lightspeed Financial, said at the Terrapinn conference. "A system might work for a day, but then the next week it’s not going to work out."
Bellafiore maintains there is still a role for discretionary traders, both in building black boxes and exploiting patterns. Despite the loss of certain patterns to the HFTs, it’s possible to find others. "We see a lot more "V" patterns, for example," he said. "We are spending 99 percent of our time focusing on new patterns instead of spending 99 percent of our time complaining about the fact that we are not making as much money as we used to."
FAQs
Like day traders, high-frequency traders try to detect patterns in quotes and trade data and take positions accordingly. Unlike, day traders, however, they rely on algorithms and a high-speed trading infrastructure to do more trades, more quickly. Point-and-click day traders can't compete.
How many trades do high-frequency traders make? ›
High-frequency traders typically compete against other HFTs, rather than long-term investors. HFT firms make up the low margins with incredibly high volumes of trades, frequently numbering in the millions.
Is high-frequency trading still profitable? ›
A high-frequency trader will sometimes only profit a fraction of a cent, which is all they need to make gains throughout the day but also increases the chances of a significant loss. One major criticism of HFT is that it only creates “ghost liquidity” in the market.
Are high-frequency traders really market makers? ›
Providing Liquidity
HFT firms act as market makers by creating bid-ask spreads and churning mostly low-priced, high-volume stocks many times daily. By constantly buying and selling securities, they ensure that there is always a market for them, which helps reduce bid-ask spreads and increases market efficiency.
What is the average return on high-frequency trading? ›
The exact average return on HFT is difficult to pinpoint, as HFT firms generally keep their detailed trading strategies and performance metrics private. However, most estimates put the average yearly return from HFT strategies between 5-15%, with the top firms generating returns of 20% or more in good years.
Can normal people do high-frequency trading? ›
One-Sided Profits High-frequency trading is not possible for retail investors due to their lack of infrastructure. Due to this, only large companies with the required infrastructure can profit using the strategy, and retail investors lose out.
What is the disadvantage of high-frequency trading? ›
High-frequency trading offers significant benefits to online Forex brokers, including speed, liquidity provision, risk management, and data analysis. However, it also comes with disadvantages such as increased market volatility, concerns about market manipulation, high infrastructure costs, and regulatory scrutiny.
Why do high-frequency traders never lose money? ›
One strategy is to serve as a market maker, where the HFT firm provides liquidity on both the buy and sell sides. By purchasing at the bid price and selling at the ask price, high-frequency traders can make profits of a penny or less per share. This translates to big profits when multiplied over millions of shares.
Why do high-frequency traders cancel so many orders? ›
As they increased the number of exchanges, the percentage of the order that was filled decreased; the more places they tried to buy stock from, the less stock they were actually able to buy.
Is HFT legal in the USA? ›
Though HFT systems are legal, they are also controversial. There are some well-known HFT practices that are simply illegal, such as spoofing and front-running.
High-frequency trading is an extension of algorithmic trading. It manages small-sized trade orders to be sent to the market at high speeds, often in milliseconds or microseconds—a millisecond is a thousandth of a second and a microsecond is a thousandth of a millisecond.
Why do 90% of day traders lose money? ›
Too much panic in the market
One of the basic reasons traders lose money in intraday trading is due to panic. In the stock markets when you panic, you actually subsidize the other trader who does not panics. Profits always flow from the trader who panics to the trader who does not panic.
Has anyone become a millionaire from day trading? ›
Many people have made millions just by day trading. Some examples are Ross Cameron, Brett N. Steenbarger, etc. But the important thing about day trading is that only a few can make money out of day trading and the rest end up losing their entire capital in day trading.
Why do most day traders quit? ›
The biggest reason most day traders fail is that they really aren't traders; they are gamblers. Day trading largely attracts individuals with a gambling mindset. In Taiwan, day trading dropped by 25% when a lottery was introduced in April 2002. When there is a large lottery jackpot, day trading activity declines.
Can you make money with high-frequency trading? ›
HFT uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Traders with the fastest execution speeds are generally more profitable than those with slower execution speeds. HFT is also characterized by high turnover rates and order-to-trade ratios.
Is high-frequency trading a good career? ›
Is high frequency trading a good career choice for programmers? - Quora. If you don't mind a work environment that's significantly more stressful and fast-paced than most other programming/SWE jobs, then sure. The pay is great (250k+) and most people would find the work is very interesting.
How many trades does the average day trader make? ›
A day trader might make 100 to a few hundred trades in a day, depending on the strategy and how frequently attractive opportunities appear. With so many trades, it's important that day traders keep costs low — our online broker comparison tool can help narrow the options.
