Many people mistake High frequency Trading & Algorithmic Trading to be the same thing and some use automated trading & algorithmic trading as synonyms. Even if some do realize that three of them are different, it's difficult to figure out what differentiates them. So, here are some definitions and differences that will clear your confusions High - frequency trading or also abbreviated as HFT is a type of automated algorithmic trading that uses powerful computationally-oriented programs to perform trade in large numbers of orders in a few seconds. HFT is recognized by its ability to perform large amounts of trades at a very high speed, its high turnover rates and high order-to-trade ratios.What is a High Frequency Trading?
In HFT, the execution speed determines the success of the traders. The faster the execution the more will be the profit and the lower the execution the lower will be the profit.
What is Algo Trading?
Algo trading or Algorithmic trading makes use of technology i.e. computers and software programs to do the trading following a precise set of instructions or algorithms back tested on historical data. These algorithms or sets of instructions are based on all the parameters that a normal human uses while trading i.e. timing, price, quantity, etc., or any mathematical model or a trading strategy.
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What is Automated Trading?
Automated Trading is a section or a subset of algo trading only. Just like algo trading, automated trading also works on some trading principles, generates auto buy & sell signals and executes the trade orders automatically. Automated trading can also be called a much simpler version of algorithmic trading.
Differences:-
They all sound the same, but there are some major differences to distinguish between them. Let’s look at what are the actual differences and which one can suit which trader.
The difference between algorithmic trading and automated trading, primarily lies in the fact that in algorithmic trading you can choose to not automate the whole trading order execution process but automated trading is all about automatic execution of trade orders. In algorithmic trading, you can choose to manually place the trade orders after receiving the signals from the software.
The core difference between algo trading and high frequency trading is the amount of trades that can be executed in a few seconds. As mentioned above HFT can place and execute huge orders in a few seconds, but algo trading can place big orders by slicing it into bits and pieces, but not all of them at the same moment in a few seconds.
In high frequency trading, the probabilities of making money lie in how making money with large orders and less time, but in algo trading the probabilities of success lie in the fact as to how much cost was saved, how much of market impact was avoided and maintenance of a healthy portfolio.
One very important point while differentiating all three is that high-frequency trading is not possible for a retail trader because of the complexities and the amount involved in it but a retail trader can trade through algo trading or automated trading.
As a developer, it is considered that automated trading is simplest of the because it uses some very basic parameters while automating the trading process, while in algo trading the algorithms have to be very sophisticated, reliable, and are normally based on a experienced trading strategies that are then back tested on a historical and present day market data.
HFT is the most complex of them all and requires complex computational powers as well as powerful computers to analyze huge chunks of data, come to a conclusion and execute the trades in a few seconds.
You can understand their relations better with this flow chart here and make some sense.
This was all about the differences between the three similar terms High frequency trading, automated trading and algo trading.
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