A guide to high-frequency trading in the Netherlands
What is high-frequency trading?
High-frequency trading, or HFT, uses algorithms to analyze data and make trades on financial markets. These two factors – speed and automation – are the key characteristics that differentiate HFT from traditional day trading.
HFT can be as short as a hundredth second (10 milliseconds). In comparison, human reaction times are around 200 milliseconds. This makes it distinctly different from regular day trading, where you base your decisions on information within 5 seconds or more.
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The goal of high-frequency trading is to make a profit through price movements. The faster you can react to market changes, the better your chances are of profiting from them.
This is also why HFT systems use complex algorithms that consider various factors, including news releases, historical data and stock prices.
HFT systems can predict how the market will move and make trades accordingly by analyzing this data.
When it comes to high-frequency trading, there are two types of strategies: passive and aggressive. Passive systems wait for opportunities to present themselves, while aggressive strategies create opportunities.
There are two ways that high-frequency trading can take place: direct and indirect. In direct trading, the orders are placed with the exchange directly.
This is the most common type of HFT. Indirect trading occurs when charges are identified with a “dark pool.” A dark pool is an informal name for a securities market where buyers and sellers meet and trade anonymously.
Like any other form of trading, there are risks associated with high-frequency trading. One of the most significant risks is “slippage.” This happens when the security price moves in a way that was not predicted by the algorithm, resulting in a loss.
Another risk of high-frequency trading is the so-called “speed collision.” This means that when two people are using the same infrastructure to trade, it can cause problems.
They compete against each other, which results in ‘collisions’, slowing both down and resulting in neither getting to trade at all.
This occurs most frequently when multiple HFT systems are situated in one place.
As far as Europe goes, Amsterdam is considered one of the top locations for high-frequency trading firms.
The city’s favourable market structure makes it an attractive location for international investors to gain European markets.
For example, Amsterdam benefits from having multiple exchanges with transparent prices.
As mentioned before, the purpose of HFT is to make a profit – or at least minimize losses. However, not all HFT strategies are aimed at maximizing returns.
For example, you might have an algorithm that facilitates large trades without causing any unnecessary price movements. This would allow institutional investors to fill their orders quickly and avoid paying more than necessary for them.
High-frequency traders can also provide liquidity. Liquidity refers to how easy it is to buy or sell shares on the market.
If many people buy and sell shares quickly, then it’s easier to buy and sell yourself.
Although most algorithms don’t come with predefined goals, some do- and they can also benefit market participants.
One type of algorithm is designed to buy shares when the price falls below a certain level; another type is intended to sell them when the price rises above another group.
These algorithms are called “stop-loss algorithms” because they aim to limit losses – which benefit all investors.
According to estimates, HFT makes up around 15-20% of total market volume (on all Dutch exchanges); this puts it higher than the U.S., where reports have put it at about 10%.
However, because there are different markets with different sets of rules in the U.S., it’s hard to compare them directly.
As far as sectors go, telecoms and pharmaceutical companies are responsible for most HFT activities, but by no means all. For example, so far this year, there has been an increase in activity in chemicals, probably due to increased uncertainty surrounding Greece’s economy.