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HFT – The Rise of the Machines


In the Forex market, even though we’re just humble price action traders, it’s impossible to ignore or escape the fabled High-Frequency Trading (HFT) industry.

To grasp the impact the HFT has on the market and its prices, we need to first acknowledge that around (at least) eighty percent of Forex trading is automated. That means, in some way, shape or form a robot or computer is buying and selling a currency pair.

At least that’s what us retail traders see. The reality is HFT is a huge corporate business.

Quant firms and banks have an army of super computers tasked with processing market orders, and they do so at speeds that up until recently were unfathomable. The earning potential of these quant firms and banks is so great that they even laid physical cables across the bottom of the Atlantic ocean to increase their potential trading speeds by, wait for it, 7 milliseconds.

That’s right folks, for an increased speed of 7 milliseconds it was worth firms spending the money to lay cables across an entire ocean.

HFT and Forex

Financial markets evolved dramatically with the mainstream availability of the PC. As soon as online trading became accessible, retail traders across the globe flooded into trading the markets, none more so than the Forex market.

That was merely the beginning. Not too long ago, retail traders were lucky to enjoy 3-4 pip spreads trading EURUSD. Now, thanks to the huge increase in liquidity, mostly credited to HFT, spreads of 0.1-3 are pretty much commonplace.

The Drawbacks of HFT

One of the major issues retail traders have with HFT, is its influence on how the market moves. Increasingly, traders are required to follow the robot or algorithmic trades, not the other way around.

An example of where we can clearly see HFT in action is before, during, and post the release of economic data. When there is economic data to be released, we’re shown a forecast, or expected value as to what is going to be announced. HFT bots also see this, after all, they’re programmed by humans. But they’re also programmed to react according to the actual announcement, and how it compares with forecasts and previous results. And boy, do they react fast.

It takes us mere humans approximately 250 milliseconds to blink an eye. In this time, the Algos have already placed tens of thousands of trades, which is why you can see the volatility surrounding major news events.

But that’s not all. Along with the Algos propensity to shake things up around news time, they’ve also transformed the way classical chart patterns are viewed today. A double top, or triangle pattern will appear different to the way it did in the textbooks we all learnt from. Again, the reason for this is that bots are programmed to identify such patterns and react in a variety of different ways. In a game where the retail trader trades these patterns in a very specific way, the bots come in and disrupt the traditional methods of trading such patterns.

The Benefits of HFT

Interestingly, the general perception of HFT is negative amongst the majority of retail traders. It seems the Algos are an easy scapegoat for our trades being stopped out, or our profit targets being missed by a pip.

While stop hunting does exist, it’s not really what we think it is.

As mentioned before, the increased liquidity thanks to HFT has cut spreads across all majors significantly. Our orders are now filled within an instant. We can now trade five-digit accounts, and even stat trading with relatively tiny initial account balances.

All in all, HFT has drastically reduced the trading costs us retail traders have to pay in order to access any financial market.

Wrapping Up

The financial markets have experienced significant change since the emergence of HFT, and will continue to experience exponential change as technology advances. As retail traders, the onus is on us to either adapt, or die.

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