High-Frequency Trading (HFT): What you need to know

Financial markets can be tough to navigate at times, especially those that experience high levels of volatility, such as the crypto market. Although market participants can benefit from volatile price swings, they can also be stung or miss opportunities due to the speed at which price moves. To help combat such issues, market participants adopt multiple types of trading.

One extreme form of trading is called high-frequency trading (HFT). In this case, traders execute a large number of orders in very short timeframes. This guide will discuss HFT trading, its pros and cons, and how it works.

What is high-frequency trading (HFT)?

High-Frequency Trading, or HFT, is a type of algorithmic trading. It involves making numerous transactions, usually in fractions of a second. By opening multiple orders in such little time, traders are engaging in high-speed trading. HFT leverages high-frequency financial data and advanced, highly sophisticated electronic trading tools. With them, it can analyze the market and execute orders automatically.

High-frequency trading relies on trading bots, which are given access to a variety of trading platforms. Trading bots can be highly effective for those who adopt HFT as they analyze large amounts of data through different tools. This enables high-frequency traders to move in and out of trades rapidly, capturing small amounts of profit per trade. To get the most out of HFT, traders seek the fastest algorithms with the lowest execution speeds. The faster the algorithm can move, the more trades it can go in and out of.


Can high-frequency trading be used in crypto?

High-frequency trading can be applied to nearly any asset. However, while HFT within the crypto market is possible, due to high levels of volatility, not everyone can execute the strategy successfully. As a result, risk management is necessary, especially during periods of high market volatility. One fundamental practice that high-frequency traders within crypto adopt to help mitigate the risk of volatility is colocation.

Colocation is a process in which high-frequency traders attempt to place their computers as close to an exchange's server. The closer the HFT computers are to these locations, the faster their access is to data. However, the HFT space has become that competitive, there is even competition to get a HFT server near an exchange's server.

How does HFT work?

While HFT within the crypto market can be complex to execute, it is easy to understand how it works. There is a lot of automation involved, making it primarily automated trading. Traders can program computers to perform high-frequency trading by hosting sophisticated algorithms. The algorithms constantly analyze digital assets on multiple trading platforms. This happens in milliseconds — a significant advantage algorithmic trading has over manual trading.

Expert traders develop algorithms that are built to detect trends and other trading signals. Some of these triggers may be too subtle for a human to notice, but a machine can quickly pick them up. Once the analysis is complete, programs determine the best course of action. After that, they automatically open a large number of positions. This occurs at high speeds as the algorithm seeks to be the first to benefit from emerging trends.

What are the key aspects of high-frequency trading?

HFT has five key aspects, which are:

  1. Orders are made through high-speed, complex programs
  2. HFT uses extremely short time frames to open or liquidate positions
  3. Using colocation services that exchanges offer, as well as other services, reduces delays in data flow
  4. Avoids overnight risk
  5. Submission of numerous orders canceled shortly after being submitted

How to apply HFT in cryptocurrency markets?

As mentioned before, HFT is applicable in the cryptocurrency industry. As for how to use this form of automated trading — there are several strategies. Using them allows market participants to be among the first to benefit from new trends in the crypto market. For example:

Market making opportunities

Market making is one approach that is commonly used by institutional traders who speculate on the spread. They use large capital to place both bids and asks in the same market. That allows them to benefit from the entire spread, which increases liquidity. Cryptocurrency trading platforms might collaborate with multiple market makers to provide liquidity, allowing the market to stay in good condition.

Arbitrage trading opportunities

Crypto arbitrage trading is another common practice of speculative traders. They speculate on the price difference of the same coin or token on multiple exchanges. The same cryptocurrency could have a different price on different platforms. Bitcoin, for example, could cost $27,260 on one exchange and $27,220 on another. Traders can use HFT to detect, exploit, and profit from these differences.

Volume trading

Finally, there is volume trading. Essentially, HFT allows users to benefit in ways that are either too risky or impossible for manual traders. Through automated trading, high-frequency traders can carry out so many transactions that they cause fluctuations through volume change.

Advantages and limitations of using HFT

High-frequency trading has several advantages and disadvantages. To be successful at HFT, one needs to be aware of both. With that being the case, let's look at high-frequency trading's pros and cons.


  • Providing liquidity to make the markets healthy and stable
  • Leveraging profits on speed and automation
  • Eliminating human error from the trading process
  • Efficient price discovery
  • Narrow bid-ask spreads
  • Enhanced market efficiency


  • It is considered to be a very risky strategy
  • Faulty algorithms can lead traders to lose their money
  • Potential for market manipulation and illegal exploitation

The growing importance of HFT in the cryptocurrency market

As the crypto market is one of the most volatile markets out there, HFT can be highly beneficial. Market participants turn to automated trading via trading bots to take advantage of order books. In doing so, they can earn a sizable profit and act as liquidity providers along the way.

However, this way of trading cryptocurrency does come with certain risks. Faulty algorithms can directly affect the trader using the algorithm. Meanwhile, algorithms can also be designed to manipulate the market and damage other traders. Like everything else in the crypto industry, HFT has good and bad sides. But, by being aware of the risks, traders can better prepare for them with risk management.


Is HFT possible with crypto?

Yes, HFT is possible within the cryptocurrency market, just like with any other market. However, cryptocurrency is riskier due to increased volatility.

Yes, HFT trading is legal, and many exchanges even encourage it. Thanks to HFT traders, exchanges gain additional liquidity providers. This is why they often offer better trading fees to HFT traders.

Is HFT trading profitable?

HFT trading can be profitable, assuming no market manipulation is taking place. Market participants can earn a profit and stabilize the market. However, HFT crypto is difficult to execute due to its complexity, and not everyone can do it.

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