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A Beginner’s Guide: What Is High-Frequency Trading in Crypto?

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Many trading strategies appeal 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 right skills to use it. So, if you’re keen on understanding the trading concept and ultimately applying this strategy in crypto trading, here’s precisely what you need to know.

High-frequency trading (HFT) is a trading system or approach that revolves around algorithmic trading that employs powerful computers and special equipment. It involves high-speed trade execution, a large number of transactions, and focuses on very short timeframes. HFT is usually complicated, and it’s mostly institutional investors who favor this technique.

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, the HFT platforms and systems can automatically open and close several positions per second and aim for short-term goals that would otherwise go unnoticed by our naked eye.

Traditionally, this technique applies to foreign exchange, 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, offering 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. On the contrary, retail traders should beware 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 was known to be accounted for up to 73% of all equities trading volume in the US, but it’s, in fact, lower in reality. 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 US alone is related to high-frequency trading. Elsewhere, about 80% of the crypto trading volume on Bitfinex is generated by HFT firms.

The Key Aspects of HFT

Although the US Securities and Exchange Commission doesn’t use a clear definition of high-frequency trading. It stressed five key aspects of high-frequency trading:

  • The use of high speed and complex programs for generating and executing orders.
  • Use collocation services offered by exchanges and other services to reduce potential delays and latencies in the data flow.
  • Utilizes very short timeframes 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 are not aware of its contribution. Most retail traders are interested in generating more profits with little effort, and HFT seems to be ideal for achieving this.

However, HFT strategies’ success depends very much on the algorithms and equipment used. Sadly, reality tells that typically institutional investors are the ones who are capable to access the best algorithms.

How Does High-Frequency Trading Work?

As you can guess, there is a lot of automation involved in the HFT process. But it doesn’t mean 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 the millisecond. 

The algorithms are created by trading experts and are designed to detect trends and other trading triggers that cannot be observed by the rest of the traders, no matter how professional they are. Based on the analysis, the programs automatically open a high number of positions at fast 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 down prices. But the algorithms would ‘buy the dip’ and exit the positions when the cryptocurrency bounces back to normal.

Note that we don’t discuss sizeable price moves but rather short-term anomalies caused by large traders. Also, algorithms can use different strategies besides going the opposite way.

Is HFT Applicable in Crypto Trading?

High-frequency can be applied to cryptocurrency trading, but not everyone can’t execute it. The scope and capability of HFT in crypto trading are similar to that seen in traditional markets. Though 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. But every millisecond can make a difference for institutional traders.

When comparing one crypto exchange to another, Gemini stood out. It is among the first cryptocurrency exchanges to provide colocation at its data center in New York. Whereas, Huobi and Chicago-based ErisX also launched colocation capabilities a few months later.

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

How to Apply High-Frequency Trading in Crypto Market?

There are several trading 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

Arbitrage trading opportunities

Crypto arbitrage is the practice of speculating on the price difference of the same cryptocurrency across multiple exchanges. For example, 1 Bitcoin costs $30,100 on one exchange and $30,050 on another simultaneously. 

Traders who detect and exploit these differences are called arbitrageurs. In fact, even though their main goal is to profit from market inefficiencies, they help to equilibrate markets by balancing the prices. Obviously, 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 regular trader.

Market Making Opportunities

Market making is another approach used by institutional traders who speculate on the spread. And 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 exchange can collaborate with one or more market makers who bring liquidity and maintain the market in a good state. Besides this, 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.

Short-Term Opportunities

High-frequency trading is not meant for swing traders and buy-and-hold (HODL) investors. Instead, it is used by traders who want to speculate on the short-term price movements. You can think about it as scalping on steroids. Though 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.

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

Volume Trading

High-frequency trading enables traders to benefit from many trades that would 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 would allow them to profit from the smallest fluctuations.

When to Use HFT in Crypto?

You can use high-frequency trading when you make sure that the promoted trading algorithm is 100% efficient. And to make sure it is not a scam. Note that even a reliable algorithm is only as good 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 whenever you feel ready.

The Benefits of HFT

Just like any day trading or other trading strategy, it comes with advantages and limitations. Ultimately, what suits you might not be the best for the others. Here’s an overview of the pros 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, typically the HFT trading platform can detect price trends before anyone else.
  • Provide liquidity to sustain the trading markets. HFT is believed to contribute sustainable benefits for the overall market. For example, it reduces the 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 observe a cause-effect. However, many believe HFT helps in the price discovery and price formation processes. Though there is a risk of price manipulation.
  • Eliminates potential errors. High-frequency trading eliminates human error. That’s due to the trading system uses complex mathematical processes to analyze markets and conduct the trading process. Thus, there is no risk of bad decisions caused by fears and emotions, which often to blame for manual traders’ losses.

The Limitations and Criticism of HFT

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

  • High risk to reward ratio. The risk-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, the chance of a significant loss can be colossal.
  • Running into faulty algorithms. Another significant risk relates to faulty algorithms or scams, whose only goal 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 trading has contributed to market manipulations and unnecessary volatility such as flash crashes.
  • Plenty of rooms for illegal exploitations. Algorithms may also be designed to place thousands of orders and cancel those seconds later after triggering a short-term price increase. Exploiting 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?

While HFT has become technically available for everyone, as there are advanced algorithms that everyone can access for a price, beginners need to be extra cautious to execute 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 tremendous experience and learn to understand the market. Perhaps, traders should start with day-trading in crypto trading, slowly refine the strategies, and work their way up to HFT.

Closing Thoughts

Whether HFT is causing ghost liquidity or may benefit institutional investors substantially, it is all about the goal and how it’s applied. Instead of focusing on the potential negative impact on the overall market, traders should regard it as a great 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.

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