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How Does High-Frequency Trading Affect Cryptocurrency Markets?

DeFi

Nick James
cryptonews.net 21 November 2022 15:00, UTC
  
Reading time: ~4 m

Thanks to high-frequency trading, cryptocurrency traders can benefit from market possibilities often unavailable to normal traders.

What is cryptocurrency high-frequency trading?

High-frequency trading (HFT) is a type of trading where rapid deals are made after thorough data analysis using sophisticated algorithms. HFT can therefore examine several marketplaces and quickly complete many orders. Fast execution is frequently essential for success in the trading world.

HFT eliminates small bid-ask spreads through the quick execution of huge quantities of deals. Additionally, it enables market players to profit from price movements before their complete reflection in the order book. HFT may therefore make money even in turbulent or illiquid markets. HFT originally appeared in conventional financial markets, but as crypto exchange infrastructure has advanced, it has now entered the cryptocurrency world. Trading on exchanges may be done with HFT in the realm of cryptocurrencies – there are already several great platforms such as Bitcoin 360 AI which introduce profitable HFT to their customers. Also, according to various media sources, HFT s already being utilized by several high-frequency trading firms, including Jump Trading, DRW, DV Trading, and Hehmeyer.

HFT is remarkable for decentralized exchanges

Decentralized exchanges (DEXs) cemented their place in the ecosystems of cryptocurrencies and finance after the decentralized finance (DeFi) boom of 2020. Users can list whatever cryptocurrency they wish on DEXs since they are less tightly controlled than centralized exchanges. High-frequency traders can trade cryptocurrencies using DEXs before they are listed on significant exchanges. Decentralized exchanges are also noncustodial, which theoretically prevents exit fraud by authors.

As a result, high-frequency trading organizations that formerly worked with cryptocurrency exchange operators to broker specialized trading transactions have shifted to using decentralized exchanges.

Decentralized exchanges are gaining more and more traction. Compared to conventional centralized exchanges, they provide several benefits, including increased security and anonymity. As a result, the development of HFT tactics in the cryptosphere is inevitable. Due to the popularity of HFT, certain hedge funds that specialize in crypto trading now utilize algorithmic trading to generate significant profits, which has led some detractors to accuse HFTs of providing larger businesses an advantage in the crypto trading market.

In any event, HFT is a staple of the Bitcoin trading industry. By utilizing advantageous market conditions in a turbulent market, HFT may be leveraged to produce profits with the correct infrastructure.

How do platforms that use high-frequency trading operate?

The fundamental idea underlying HFT is straightforward: buy cheap, sell high. HFT algorithms evaluate a lot of data to find patterns and trends that may be used to make money in this way. For instance, an algorithm may see a specific price trend and swiftly carry out many buy or sell orders to profit from it.

The Securities and Exchange Commission of the United States does not have a set definition for high-frequency trading. Though it offers the following five HFT fundamentals:

• Generating and carrying out commands with the aid of swift and sophisticated programs using colocation services provided by exchanges and other services to reduce possible delays and latencies in the data flow;
opening and closing positions in quick periods;
multiple orders were submitted, all of which were promptly canceled;
reducing overnight risk exposure by holding positions for very brief periods.

In a word, HFT employs advanced algorithms to quickly and continuously assess all cryptocurrencies on various exchanges. HFT algorithms have a major edge over human traders because they function fast. They are incredibly adaptable and may trade across many asset classes and exchanges simultaneously.

HFT algorithms are designed to identify trading triggers and trends that are difficult for the unaided eye to see, especially at the speeds needed to open several positions at once. Being the first to act when the algorithm discovers a new trend is the ultimate objective of HFT.

For instance, the price often changes after a significant investor establishes a long or short position on a coin. HFT algorithms trade in the opposite direction of these future price swings to take advantage of them and fast turn a profit.

However, because they frequently cause prices to fall, huge Bitcoin sales are typically bad for the market. The algorithms "buy the dip" and leave the positions, allowing the HFT business or trader to benefit from the price fluctuation, but when the coin returns to normal, they do the opposite.

Since digital assets are getting more exchanged on decentralized exchanges, HFT in cryptocurrencies is gaining traction. These exchanges can offer substantially quicker trading speeds since they do not have the same centralized infrastructure as traditional exchanges. Given that it calls for split-second decision-making and execution, this is perfect for HFT. High-frequency traders typically make many transactions every second to build up little earnings and produce a significant profit.

Although there are too many HFT methods to enumerate, some could be more novel to seasoned investors because they have been around for a long time. HFT is typically associated with traditional trading strategies using cutting-edge IT capabilities. HFT, however, may also be used to describe simpler strategies for profiting from market opportunities.


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