Scope of High Frequency Trading & Analytics
The scope of HFT is vast, covering everything from providing liquidity to exploiting tiny inefficiencies in physics (speed of light).
1. Market Making (Liquidity Provision)
The largest scope of HFT.
- Role: Replaced human "Specialists" on the exchange floor.
- Activity: passive strategy. Posting limit orders on both sides.
- Scope: ~50-60% of all volume in US equities is HFT Market Making.
2. Statistical Arbitrage (Stat Arb)
- Pairs Trading: Buying Pepsi / Selling Coke (if correlation breaks).
- ETF Arbitrage: Buying the ETF and selling the underlying basket of stocks (or vice versa).
- Scope: ensuring prices are aligned across related assets.
3. Latency Arbitrage
"The Race to Zero."
- Exploiting price differences between two exchanges (e.g., BSE and NSE) caused by the time it takes data to travel.
- Scope: Requires expensive infrastructure (Microwave towers, Lasers, FPGAs).
4. Event-Based Trading (News Analytics)
- Parsing "Machine Readable News" (Bloomberg terminal feeds) in milliseconds.
- Example: Algo reads "Interest Rate Hike" -> Sells Nifty Futures instantly.
- Scope: Natural Language Processing (NLP) meeting HFT.
5. Order Flow Prediction
- Analyzing the "ticks" to predict the next 5 seconds of movement.
- Activity: "Sniffing" for large institutional orders (Prey) to trade in front of them (Predator).
Note
Limit of Scope: HFT strategies are Capacity Constrained. You cannot manage $100 Billion using HFT because your orders would be too big and ruin the strategy. HFT is for "small capital, high turnover".
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