12.08.2020
High-Frequency Crypto Trading

High-Frequency Crypto Trading. HFT’s algorithms and strategies

If you’ve just finished watching Terminator: Dark Fate, you have a perfect idea of what’s going on: machines have already taken over.

Already?

Oh, good old early days, huh? The sky was blue, the corn yellow and juicy, and the playing foeld was level. There was a gold standard behind the dollar and not so many foreigners and automated ackasses after one’s job. No-one even dreamed of fully automated factories and buildings full of robots with thousands or even millions of people laid off. Individual traders were the only way. 

But now a new danger is afoot: a much more dangerous enemy is already inside the country. A ton of supersmart sentient machines made a cozy nest inside the New York Stock Exchange, one of the most powerful and influential global stock markets, and they are all doing what they do best: taking our jobs. 

High-Frequency Trading once was the niche of humans. It started off in the 90s after the SEC decided to allow automated trading in 1988. You can imagine the fervor: bots capable of making money. As machines got better, however, it turned out humans were no match for robots when it came to reaction times, analytical capabilities, and cold-bloodedness. So basically every Terminator movie ever. 

Terminator

How did that happen? Even as far back as 2012, almost 90% of trading was completed by machines. Why? It’ll take you half a second to react to a change in price and quite a few seconds to move your mouse and place an order. A machine can do that a little bit faster — they operate at speeds of a millionth of a second. 

The highly volatile world of crypto is full of all manner of traps. Drastic price movements, technical analysis fails, major exchanges getting hacked…The dangers are increasing exponentially — and so is the data flow! The human mind can only handle so much. Of course, it doesn’t machine an hour to calculate and combine Bollinger bands. It juggles 100 futures contracts at the same time while programming a drone to bring your smart house some milk anв compiling a cure for cancer (99% complete, please hold). The conclusion is obvious. HFT trading is the way forward. Trading programs rule. Leading hedge funds today use them to calculate sky-high profits for institutional investors — and really, the only question is: how did we live without them? That’s what the rich think anyway. 

What to read 

Learning is earning

What’s so hot about digital currency, Wall Street, and moving averages? There’s obviously money to be made. Learning is earning. But more than the thrill of the hunt and the sense of achievement, what you also get is the sense of indescribable freedom. Which is arguably the most high-priced asset we have (even Bitcoin doesn’t compare, believe it or not). Crypto exchanges like Nominex offer you a way to step into the future with 1) unlimited opportunities, 2) stellar security, and 3) staggering simplicity of use. Those qualities are how you get ahead, and Nominex and HFT are proof of that.  But how did it all come about? 

Want to find out more about trading strategies and this exciting new industry rising? Cryptocurrency has your interest?  If you find yourself in love with the concept and want to get engaged, try these awesome books for even more opportunities to prosper: 

  • “High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems” by Irene Adlbridge 
  • “High-frequency Trading” — Maureen O’Hara, Marcos Lopez de Prado, David Easley
  • “Inside the Blackbox” — Rishi Narang.

What’s so fascinating about automated trading that you’d want to study books about it, you say? Trading strategies like RSI work.  Why not just stick to that? The cryptocurrency market is a tempting enough opportunity to register at an exchange, get in, make some money — and get your fill of adventure for the day. What’s up with high-frequency trading? 

Who cares about trading bots, immensely big opportunities, and so much money you could build a maze so big with it that you can walk in there for the rest of your life and never pass the same place twice? Well, it’s true that you can trade after just learning the basics. But we do think that after a while, when you get really good, you’ll develop the taste for even higher mountain peaks. 

High Frequency Trading explained 

Essentially what happens is that many traders make money using fundamental analysis. FA is about trying to determine how much an asset is worth by studying

  • how well the company is run, 
  • who’s in charge, 
  • what’s going on in the economy,
  • what’s the demand, 
  • and so on. 

Also, news is a good indicator of what is happening in terms of the price. 

Coronavirus

Imagine France’s President, in the middle of the viral outbreak (which is currently going on, read our article on how to survive and make money) decides that Bitcoin is the best and that the French should all use Bitcoins because coronavirus is transmitted by touch through dollars. 

Now, when news like that hits the streets, the price will be going up really quickly in our theoretical example. You will know as soon as an article is published in Forbes — if you have push notifications, in which case you will know straight away. 

If not, you’ll find out later that the prices changed. You may be (unlike a machine) asleep or on holiday. Or maybe you are watching the news feverishly hoping to get lucky and then there the news is — but it takes you quite some time to read the article. And then make a decision. But machines at Wall Street already scanned it for keywords and they know exactly what the text is about. And they already beat you to it. Long story short — High-Frequency Trading (algorithm-based trading executed by ultra-fast machines) is taking over. 

Hedge funds and proprietary trading houses like Hehmeyer Trading, DV Trading, Flow Traders BV, and countless others make a handsome profit using trading bots who use HFT to make returns for their institutional investors. 

HFT in simpler terms

Algorithmic trading

HFT is about algorithmic trading. It uses extremely powerful computers and extremely fast Internet to analyze huge amounts of market data, news, and other information to buy assets very quickly, but with surgical precision. It takes fractions of seconds to execute tons of orders. Great thinking! 

The advantage here is speed. Machines are great at speed. We’re pretty sure it would take you a while to multiply 33203365228282 by 303420935821. It would take a calculator a fraction of a second to do that. So HFT is all about using the machines’ greatest advantage. Now, how to use it even more effectively? What about buying quickly and selling also quickly?

SkyNet’s digital Diary, Chapter 1: erasing humans 

  1. Use amazing analytical capabilities to analyze where stocks are likely to be going while a human begins to blink. 
  2. Quickly buy a million shares. 
  3. Did the price rise by 10 cents? Profit! Quickly sell. 
  4. The blink is finished. 
  5. Capital raised! Now all that’s left is to set up a Terminator factory. 

Main characteristics of HFT

  1. Huge volumes.
  2. Short positions.
  3. Definitely no hodling.
  4. Uses the best code (C++, C#, etc), solutions like FIX/FAST, Nasdaq TotalView-ITCH (“TotalView”) and FPG.
  5. Extremely fast access time with low latency (delays).
  6. Adds tons of liquidity fast.

Machine strategy wars: who benefits?

Trading Strategy

Companies who use HFT obviously want to keep their secret strategies to themselves. In this game, HFT traders compete with other HFT traders to make a profit. Oh, the stories we could tell! 

Companies stop at nothing to ruin another’s fun. Some make insider trading legal by using event arbitrage. Others have code that will throw out a lot of stupid and irrelevant offers onto the market that will never be fulfilled. Other’s software, however, will have to stop and analyze all of that junk — and yours doesn’t, so it just skips over it.

Dirty tricks like spoofing and quote stuffing are actually the same as price manipulation, which is illegal, but whether it stops anyone — still remains the question. After all, who is so smart they know the technology so well that they can analyze endless lines of ultra-complex code created by machines? No-one (well, maybe but that would be like trying to beat the calculator in our math calculation example before). 

How is HFT used in cryptocurrency markets?

When it comes to crypto trading because HFT relies on price changes, Bitcoin’s volatility is pure heaven for this type of trading. With many more crypto exchanges, brokers, and much greater scalability for both Bitcoin and trading markets, it’s literally a dream come true. It has been estimated that the average Bitcoin volatility in one day is 23 times higher than for the S&P 500.  

What’s more important, however, is that HFT adds liquidity, which has been Bitcoin’s problem for ages. And it’s really inspirational that HFT combined with crypto could produce stellar results. Adding liquidity to Bitcoin would really enable it to soar. HFT also does not add to volatility (no data to support that theory). In brief, Bitcoin and HFT were made for each other, and they certainly have terrific prospects together.

One of the best ways to get into this niche before the third halving and Bitcoin rocketing to at least $100 000 is Nominex. One of the most eye-pleasing and novel platforms around, it offers momentary registration, superb security, and unprecedentedly intelligent design. 

Pair that with unprecedentedly intelligent HFT machines — and it’s very likely you’ll be looking back on this time 5 years later, remembering how Bitcoin was worth $5000 and Googling “Bitcoin Price USD” and seeing $250 000 — and laughing. Not all of you, of course, thanks to the coronavirus (cough-cough). 

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