Algorithmic Trading Strategies

HFT firms do not just use one strategy. They deploy a portfolio of "Alphas". Here are the three main categories.

1. Market Making (Passive)

"Earn the Spread"

• Strategy: Place both Buy (Bid) and Sell (Ask) limit orders constantly.
• Goal: Buy at 100.00, Sell at 100.05. Pocket the 0.05 spread.
• Risk: Values move against you (Inventory Risk). If price crashes to 99, you are left holding the bag.
• Tech: Requires ultra-low latency to cancel orders before being "picked off".

2. Statistical Arbitrage (Stat Arb)

"Exploit Correlations"

• Pairs Trading: HDFC Bank and ICICI Bank usually move together.
  • If HDFC goes up +2% and ICICI is flat (0%), the algo Shorts HDFC and Buys ICICI, expecting them to converge.
• Index Arb: If Nifty Futures price $\neq$ Spot Nifty basket price, the algo buys the cheaper one and sells the expensive one.

3. Momentum / Trend Following (Aggressive)

"Ride the Wave"

• Strategy: Detect a surge in volume or a breakout. Send Market Orders to jump on the bandwagon.
• Momentum Ignition: (Controversial) Some algos try to start a trend by dumping volume quickly to trigger other people's stop losses, then profiting from the cascade.

Loading quiz…