High Frequency Trading (HFT)

[citydweller]

I was chatting with a guy on a trading message board about high frequency trading (HFT) explaining that HFT can move the market (e.g. the S&P 500) in an illiquid market, and he says "My point, which still stands, is that HFT has zero impact on moving the S&P 500 index. By definition if HFT was taking positions, it wouldn't be considered HFT. If by HFT you meant automated orders then of course if the algorithms kept hitting stops and continued buying it would impact prices. But algos and automated orders that take on positions have nothing to do with HFT."

He seems to think that because HFT only holds trades for milliseconds that it's not considered "taking a position" and thus can't move the S&P 500 (or another large market index).

Is he correct or not? If not, why?

 

[Andy Nguyen]

You can find questions on the following Stackexchange which has many HFT-related questions
http://quant.stackexchange.com/

 

[tobias elbert]

I understand where he is coming from, but think that this is quite a narrow definition of HF algo trading. It's just that conventionally HFT systems do not actively take positions and are in the business of liquidity provision. In terms of market impact it also depends on how you define it. Liquidity provision systems do not actively hit the market (so no impact on trade price) most of the time, but I think they still have an impact in terms of the buffers they create and thus impact on price formation.

 

[Alexander Krosky]

He's completely correct. HFT by nature doesn't take directional positions, which is what he meant by "positions". Algorithmic trading, in reference to algorithmic execution of block orders, takes directional positions. Algorithmic execution is merely just a superior alternative to sending your block order to a flow trader who is on god knows what drugs at the time.