What Is High-Frequency Trading (HFT) In the Crypto Market?

Join our community & learn for free
No Spams. Only heaps of sweet content and industry updates in the crypto space.

Many trading strategies appear to be profitable to cryptocurrency traders, but a few promise an edge over the rest. One such example is high-frequency trading, though it’s evident that it may or may not be perfect for everyone.

In this guide, we’ll explain the ins and outs of high-frequency trading. But do note that this approach doesn’t necessarily guarantee success, as it also assumes that you have the skill set to use it. So, if you’re keen on understanding the HFT trading concept and ultimately applying this strategy to crypto trading, here’s precisely what you need to know.

High-frequency trading (HFT) is a type of algorithmic trading that involves high-speed trade execution in fractions of a second. Institutional investors largely employ this method.

What Is High-Frequency Trading (HFT)?

As the name suggests, HFT is all about speed. This technique uses various algorithms to analyze the smallest price changes and discrepancies between the same asset prices on multiple exchanges. Typically, HFT platforms and systems can automatically open and close several positions per second, aiming for short-term goals that would otherwise go unnoticed by the naked eye.

Traditionally, this technique applies to foreign exchange (forex), stock, and other markets. However, over time, high-frequency trading has gained traction in the crypto space, mainly because of the multiple trades per second that can offer a slew of benefits. Of course, there are also specialized services that provide HFT platforms for institutional investors to help them benefit from the high volatility of cryptocurrencies. However, retail traders should be wary of suspicious online services pretending to provide efficient HFT algorithms in exchange for a price paid in advance. Most of these algorithms don’t work at all.

Previously, high-frequency trading supposedly accounted for up to 73% of all equities trading volume in the US, but in reality, it’s lower than that. In 2017, Aldridge and Krawciw found that HFT was responsible for 10–40% of trading volumes in equities, and 15% in foreign exchange and commodities. However, when it comes to intraday trading, the share of HFT may range between 0% and 100% at any given time. Nasdaq claims that half of the stock trading volume in the U.S. alone is related to high-frequency trading.

Key Aspects of HFT

Although the U.S. Securities and Exchange Commission doesn’t use a clear definition of high-frequency trading, it stresses five key aspects of high-frequency trading:

  • The use of high-speed and complex programs for generating and executing orders.
  • Use of colocation services offered by exchanges and other services to reduce potential delays and latencies in the data flow.
  • Utilization of very short time frames for opening and liquidating positions.
  • Submission of multiple orders that are canceled shortly after submission.
  • Avoiding overnight risk.

All in all, HFT is an integral and crucial part of all markets. That includes cryptocurrency, even though most retail traders aren’t aware of its contribution. They’re interested in generating more profits with little effort, and HFT seems ideal for achieving this.

However, HFT strategies’ success depends to a large extent on the algorithms and equipment used. Sadly, the reality is that typically, institutional investors are the ones who are capable of accessing the best algorithms.

How Does High-Frequency Trading Work?

As you can guess, there’s a lot of automation involved in the HFT process. But not everyone can use this method. In a nutshell, the computers used to conduct high-frequency trading are programmed to host sophisticated algorithms, which continuously analyze all cryptocurrencies across multiple exchanges by millisecond. 

The algorithms are created by trading experts and are designed to detect trends and other trading triggers that other traders cannot observe, no matter how professional they are. Based on analysis, the programs automatically open a large number of positions at high speed. The main goal is to be the first to benefit from the emerging trends detected by the algorithm.

When a large institution or whale opens a large long or short position on a particular cryptocurrency, the price tends to follow the position’s side after the trade.

Generally, the algorithms used by high-frequency traders are built to scour these price moves and to trade on the opposite side. For instance, a large sale of a cryptocurrency might drag prices down. But the algorithms “buy the dip” and exit the positions when the cryptocurrency bounces back to normal.

Note that we’re not discussing sizable price moves but rather short-term anomalies caused by large traders. In addition, algorithms can use different strategies besides going the opposite way.

An Example

High-frequency trading (HFT) seeks to take advantage of small price fluctuations to exploit the bid-ask spread. The bid-ask spread is simply the difference between the price at which you buy and the lowest price at which you’re able to sell.

When you buy a cryptocurrency like Bitcoin, you’re not paying the market price; rather, you’re hitting the ask price, which is higher than the market price. Conversely, if you sell Bitcoin, you’ll be paid the bid price, which is lower than the current market price.

Here’s an example:

  • Bitcoin ask price: $34,500
  • Bitcoin bid price: $34,450

The bid-ask spread, in this case, is $50.

The HFT algorithms will seek attractive bid-ask spreads that they can exploit.

While each of these HF trades generates small amounts of profits, executing thousands of them can make it a very profitable strategy.

Many other HFT strategies, such as arbitrage or HFT programs, seek discrepancies in prices that aren’t visible to the human eye. 

Is HFT Applicable to Crypto Trading?

High frequency can be applied to cryptocurrency trading, but not everyone can execute it. The scope and capability of HFT in crypto trading are similar to that seen in traditional markets. However, the crypto space is more volatile, full of opportunities and risks.

One of the basic HFT practices used in the crypto space is colocation. Colocation is used when a trading server is placed as close to an exchange’s data center as possible. Ideally, the server is found in the same facility as the exchange, ensuring minimum latency in data transmission. While the slight delays in data transmission for retail traders are not so significant, every millisecond can make a difference for institutional traders.

Besides colocation, HFT algorithms are commonly used for arbitrage and short-term trading in cryptocurrency markets.

How to Apply High-Frequency Trading in Crypto Markets

There are several systems and strategies that rely on high-frequency trading. They help traders become the first ones to benefit from emerging market trends. Regular traders are commonly excluded from such privilege, as they don’t employ sophisticated trading algorithms.

Here are the main types of high-frequency trading opportunities.

Arbitrage Opportunities

Crypto arbitrage is the practice of speculating on the price difference of the same cryptocurrency across multiple exchanges. For example, one Bitcoin may simultaneously cost $30,100 on one exchange and $30,050 on another. 

Traders who detect and exploit these differences are called arbitrageurs (AHR-bi-trah-zhur). In fact, even though their main goal is to profit from market inefficiencies, they help to equilibrate markets by balancing the prices. Obviously, by using efficient HFT algorithms, traders become the first to take advantage of these price differences. 

Besides detecting arbitrage opportunities, HFT platforms can open multiple positions and conduct trades hundreds of times faster than any human trader can.

Market Making Opportunities

Market making is another approach used by institutional traders who speculate on the spread. Market makers with large capital are placing both bids and asks into the same market. That allows such traders to benefit from the spread and also helps the market ensure liquidity.

In regular trading, market-making is offered by large companies and is regarded as a positive practice. Cryptocurrency exchanges can collaborate with one or more market makers who bring liquidity and maintain the market in a good state. Additionally, there are HFT market makers who don’t have any contracts with the exchange platforms. Their goal is to leverage their algorithms and benefit from the spread.

As their name suggests, market makers make a profit by providing liquidity to the market. In other words, they are the counterparty to your trade.

For example, they might offer Bitcoin to sell at $35,100 (bid price) to anyone who wants to sell their Bitcoin holdings and, at the same time, charge $35,120 (ask price) as the selling price. That $20 difference between the bid and ask prices is how market makers earn money for providing a service — aka, liquidity.

Short-Term Opportunities

High-frequency trading is not meant for swing traders and buy-and-hold (HODL) investors. Instead, it’s used by traders who want to speculate on short-term price movements. You could think about it as scalping on steroids. However, HFT employs powerful computers and algorithms that can secure profits within seconds or even milliseconds. High-frequency traders move so fast that the price may not even manage to respond on time.

Here’s an example:

HFT Example

To put everything in context: when a whale dumps a cryptocurrency, its price will likely decline for a very short period before the market adjusts to meet the balance between offer and demand. While most manual traders cannot exploit this dip since it may last only minutes (or even seconds), it represents an excellent opportunity for high-frequency traders. They have plenty of time to let their algorithms do the trick.

Volume Trading

High-frequency trading enables traders to benefit in ways that would either be impossible or too risky for a manual trader. By relying on automation, a high-frequency trader can carry out enough transactions whose aggregate volume allows them to profit from the smallest fluctuations.

When to Use HFT for Crypto

You can use high-frequency trading once you’ve made sure that the promoted trading algorithm is 100% efficient — and isn’t a scam. Note that even a reliable algorithm is only as dependable as the person who created it. So it makes sense to conduct due diligence before engaging in high-frequency trading.

Once you find the algorithm that best suits your needs, you can engage in HFT when you feel ready.

The Benefits of HFT

Just like any day trading or other trading strategy, HFT comes with advantages and limitations. Ultimately, what suits you might not be what fits others. Here’s an overview of the pluses of crypto trading with high-frequency techniques.

  • Leverage profits on speed and automation. For traders, the main benefit of HFT has to do with speed and automation. That’s mainly because the algorithms don’t need human intervention to spot market opportunities and open hundreds of positions within minutes or seconds. Besides, HFT trading platforms can typically detect price trends before anyone else.
  • Provide liquidity to sustain the trading markets. HFT is believed to contribute sustainable benefits to the overall market. For example, it reduces bid-ask spreads by bringing more liquidity, even though it’s short-term. In 2012, Canadian authorities introduced trading fees that discouraged high-frequency trading. Shortly after that, the spread rose by almost 10%, and many observed a cause-and-effect relationship. It is believed that HFT helps in price discovery and formation processes, even though there is a risk of price manipulation.
  • Eliminates potential errors. High-frequency trading eliminates human error. That’s because HFT systems use complex mathematical processes to analyze markets and conduct the trading process. Thus, there’s minimal risk of poor decisions caused by fears and emotions, which are often to blame for manual traders’ losses.

Limitations and Criticism of HFT

Despite all the benefits and opportunities, HFT is still a controversial activity. Many jurisdictions even ponder banning it because of potential market manipulation.

  • High risk-to-reward ratio. The risk-to-reward ratio in HFT is very high compared to traditional trading methods. Each position of a high-frequency trader can generate only several cents in profits. The idea is to secure an aggregate profit by opening multiple positions. However, there is also the chance of significant, even colossal, loss.
  • Running into faulty algorithms. Another significant risk relates to faulty algorithms or — even worse — scams, the goal of which is to attract traders to make advance payments for a service that hasn’t been proven to work.
  • Potential for favoritism and market manipulations. Besides risks, HFT is criticized for helping a privileged group of traders profit at the expense of smaller players who don’t have similar opportunities to invest in expensive algorithms. When it comes to traditional markets, critics also suggest that HFT has contributed to market manipulations and unnecessary volatility, for instance flash crashes.
  • Plenty of room for illegal exploitation. Algorithms may also be designed to place thousands of orders and cancel them seconds later, just after triggering a short-term price increase. Exploiting through this kind of deception is regarded as immoral, and often illegal. Another major criticism of HFT is that it generates only “ghost liquidity,” as the multiple orders placed by such traders last only several seconds or minutes.

Is High-Frequency Trading for Everyone?

HFT has become technically available for everyone, as there are advanced algorithms that everyone can access for a price. However, beginners need to be extra cautious when executing it.


HFT is more suitable for institutional investors who understand the market and know how to deal with unexpected outcomes.

The best recommendation would be to stick with manual trading to gain experience and understand the market. Perhaps traders should start with crypto day trading, slowly refine their strategies, and eventually work their way up to HFT.

Closing Thoughts

Whether or not HFT is causing ghost liquidity, or benefiting institutional investors substantially, ultimately, it’s all about the goal and how it’s applied. Instead of focusing on the potential negative impact on the overall market, traders may regard HFT as a potential opportunity.


This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

Join our community & learn for free

No Spams. Only heaps of sweet content and industry updates in the crypto space.

Related Articles